These Markets are Telling Bernanke that QE Hasn’t Worked for Years

‘Don’t fight the Fed,’ has been a convenient way to explain rising prices across the board. It’s even true as far as stocks are concerned, but there are other – even more important markets – that are openly defying QE. Begging the question, when will the hammer hit stocks?

It’s not widely publicized, but Bernanke’s QE bazooka has had some spectacular misfires.

The only market that’s recovered after every misfire is equities. If you look at the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) you’ll see about one misfire (at worst a 20% correction) per year followed by a strong recovery.

QE had done its job as far as equities were concerned, but it looks to be a ‘one trick pony.’

The same ‘medicine’ (or drug) that’s doing wonders for stocks is causing nausea (or hangover) for other asset classes. Which ones? How about gold (NYSEArca: GLD), silver, and long-term Treasuries (NYSEArca: TLT)?

The chart below is a side-by-side demonstration of QE’s failure to launch gold, silver and Treasuries. Charted is the performance of the corresponding ETFs (GLD, SLV and TLT) during their respective crashes.

From September 2011 to June 2013 gold prices fell 38.85%. From April 2011 to June 2013 silver lost a stunning 63.42% and the iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT) is down 22.70%, since its July 2012 high.

Why? Gold and Silver

The Fed was still priming the pump in 2011, 2012 and 2013 and investors were still concerned about inflation. The same forces that drove prices to all-time highs persisted when prices hit an air pocket. The inexplicable happened!

Why? 30-year Treasuries

Treasury yields – in particular the benchmark 10-year note (Chicago Options: ^TYX) – have a huge economic impact. It’s the financial power horse that carries the economic carriage.

That’s why the Federal Reserve has been buying trillions of dollars worth of Treasuries to keep yields down. The 10-year Treasury yield is the highest it’s been in over two years. The inexplicable happened!

Why did gold and silver crash? Why are Treasury yields rising and bond prices falling?

This common sense analogy comes to mind: Another fix (aka more QE) for a junkie (aka banks) only postpones the inevitable.

How long will it be before stocks get hit by the inexplicable inevitable?

A stock market ‘event’ may not be too far off. In fact, via a series of recent studies, the Federal Reserve has started the process of officially denying liability and preparing Americans for a possible market crash.

This study is the most interesting of all: Surprising New Fed Study – Is it Preparing Americans for a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF.

 

 

SPY vs TLT – Chart Shows Trouble

Years of rising prices have conditioned investors not to fight QE. The recent stock market correction was expected and is nothing out of the ordinary, but the performance of Treasury should raise eyebrows.

Are the days of “Don’t fight the Fed” over?

Obviously it’s too early to tell, but a comparison between the SPDR S&P 500 ETF (SPY) and the iShares Barclays 20+ Year Treasury ETF (TLT) reveals a new twist.

Long-term Treasury bonds might be telling the Fed: “The QE gig is up!” Why?

Stocks and bonds generally have an inverse relationship. When stocks go down, bonds go up and vice versa.

The blue boxes in the chart show that TLT rallied every time SPY declined by more than 5%. Since early 2010, when investors dumped stocks, they stocked up on bonds. When confidence in stocks ebbs, confidence in bonds flows.

This time is different!

Since the May 28 high, SPY has fallen as much as 7.9%. At the same time TLT has lost as much as 9.1%. Yes, long-term Treasuries got hit harder than stocks.

What does this mean? In short, it’s a warning shot across the bow.

The Federal Reserve has been funneling QE-money into purchases of its own Treasuries. This (until recently) has kept prices afloat and interest rates low.

The fact that investors are dumping Treasuries despite falling stocks is an early warning sign that they have lost faith in the Federal Reserve’s ability to artificially prop up prices.

It is said that bond investors are smarter than stock investors and bond investors seem to have lost trust in the Fed’s QE. If bond investors’ suspicion spills over into the stock market, watch out.