The day Lehman failed saw the launch of the most epic central bank intervention in history with the Fed guaranteeing and funding trillions worth of suddenly underwater capital. However, what Bernanke realized quickly, is that the “emergency, temporary” loans and backstops that made up the alphabet soup universe of rescue operations had one major flaw: they were “temporary” and “emergency”, and as long as they remained it would be impossible to even attempt pretending that the economy was normalizing, and thus selling the illusion of recovery so needed for a “virtuous cycle” to reappear.
Which is why on November 25, 2008, Bernanke announced something that he had only hinted at for the first time three months prior at that year’s Jackson Hole conference: a plan to monetize $100 billion in GSE obligations and some $500 billion in Agency MBS “over several quarters.” This was the beginning of what is now known as Quantitative Easing: a program which as we have shown bypasses the traditional fractional reserve banking monetary mechanism, and instead provides commercial banks with risk-asset buying power in the form of infinitely fungible reserves.
This program has been so successful in its true intended goal – enriching its benefactors, the banks, who have managed to push the S&P to fresh five year highs (and the Russell 2000 to records) even as the economy has deteriorated to subpar growth not seen in years, in the process replacing a vibrant workforce with a part-time, gerontocratic labor pool, committing the US economy to many more years of subpar growth, that many more years of Fed interventions, a la QE, are assured (not to mention the need to monetize trillions more in US government deficits).
So how does all this look on paper?
We have compiled the data: of the 1519 total days since that fateful Tuesday in November 2008, the Fed has intervened in the stock market for a grand total of 1230 days, or a whopping 81% of the time!
Sadly, what the chart above shows, is that of the 51 months starting with November 2008 – the birthdate of the first QE, there have been a total of 9 (nine) months in which the market has been intervention free. Incidentally, the same months that have seen it plunge.
The same chart above presented in graph format courtesy of Stone McCarthy. The shaded areas show periods of explicit Fed intervention in the capital markets.
After looking at the chart above, if anyone still thinks there is a chance that US bond yields will “tumble” while everyone will continue to frontrun the Fed’s ongoing purchases, which will continue into 2015 as there are at least $2 trillion in deficits in the next two years that have to be monetized by someone – the same someone who has bought some 90% of net non-ZIRP (5 years and lower maturity) issuance from the US Treasury, we have a bridge to sell to you.
As a reminder, this is the distribution of TSY holdings by the Fed ten years ago…
… And today:
For those who may have forgotten all the nuances and details of every Fed move in the past four and change years, here is a vivid reminder courtesy of SMRA:
LSAP Round 1 – QE1
The first large-scale asset purchase program — so-called QE1 — was signaled by Chairman Ben Bernanke’s speech at the Jackson Hole Symposium at the end of August 2008. The FOMC chose to announce it during the intermeeting period on November 25, 2008. What was originally for $100 billion in GSE direct obligations and $500 billion in Agency MBS “over several quarters” evolved several times in the coming months. The FOMC first said it was ready to expand the quantity and duration of the program on January 28, 2009, and put that into effect at the March 18, 2009 FOMC meeting. This included buying up to $300 billion of longer-term US Treasurys over the next six months. The amounts of Agency and Agency MBS buys were upped in March to $1.25 trillion and $200 billion, respectively. Purchases of Treasurys ended in October 2009. Purchases of Agencys were reduced to $175 billion in November 2009, and the program wound to a close in March 2010.
The intent of the program was to augment the then-historic low in the fed funds target rate of 1.00% with unconventional monetary policy measures. The impact of the program was estimated to be equivalent to about 50-75 basis points in rate cuts. On December 8, 2008 the FOMC established the near-zero fed funds target rate range of 0%-0.25%.
LSAP Round 2 – QE2
The second large-scale asset purchase program — dubbed QE2 — was smaller than the first and was for Treasurys only, and underwent no changes in its duration. The FOMC announced purchases of about $600 billion in longer-term Treasurys on November 23, 2010, and lasted through the end of the second quarter 2011.
The additional accommodation was to address a period of too-low inflation.
Maturity Extension Program – Operation Twist
The Maturity Extension Program — called “Operation Twist” because of its resemblance to the original “Operation Twist” in the early 1960’s — announced by the FOMC on September 21, 2011 involved about equal amounts in sales of shorter-term Treasurys from the Fed’s portfolio and purchase of longer-term Treasuries. The total amount was for about $400 billion over a period through the end of the second quarter 2012, and was to increase the average maturity of the Fed’s holdings of Treasurys to about 100 months. A continuation of the program was announced on June 20, 2012 to extend it through the end of 2012 with an additional $276 billion in sales of Treasurys of three years or less, and buying of Treasurys of 6-30 years in maturity. At his June 20 press briefing, Chairman Bernanke indicated that no further continuations of this program would take place.
The program was intended to support low interest rates and provide an incentive to move to riskier assets like stocks.
LSAP Round 3 – QE3
On September 13, 2012, the FOMC announced another round of asset purchases — referred to as QE3. This time purchases were in Agency MBS and for open-ended buys of $40 billion a month.
The program was deemed necessary because the labor market simply was not improving fast enough to draw down unemployment at an acceptable rate. Chairman Bernanke and other FOMC participants voiced concerns in public remarks around the FOMC meeting that workers separated from the labor force were losing ground in terms of deterioration in skills and connection to the workplace, and that it was necessary for the Fed to act to fulfill its mandate for maximum sustainable employment and support growth.
The open-ended nature of the program had two advantages. It communicated to markets that the Fed would maintain its stimulus until the labor market improved substantially, and it would allow the central bank to taper off the program and avoid the immediate uptick in rates that has followed on the end of earlier calendar-based programs.
On December 12, 2012, the FOMC announced an expansion of the asset purchases with $45 billion for month in longer-term US Treasurys to replace the support of the expiring MEP program. With the new purchases of US Treasurys in a wider basket of maturities, the average maturity of the Fed’s portfolio has begun to level off.
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Hopefully the above should also explain why the retail investors is done:
Yes, it is the endless microfraud that is HFT scalping, churning and subpennying every order, or what little orders are left;
Yes, it is the still vivid memory of a 50% drop in the market when nobody, nobody, said it was possible;
Yes, it is the fact that the vast majority of what is left of America’s Middle Class has no unlevered disposable income;
Yes, it is that as the baby boomers, who have concentrated the vast amounts of America’s wealth start retiring the last thing they will care about is return on capital as opposed to return of capital,
Yes, it is the now glaring breakdown between deteriorating economic fundamentals, declining corporate revenues and now profits and the stock market…
… But most of all it is the now all too clear realization that a “market” that needs the Fed’s explicit support 81% of the time in the past 1519 days (and counting) to prevent it from collapsing, is anything but a market.
(10 votes)
