QE1 & QE2 Failed.
QE3 was a lock.
Now what?
If you think that “this time is different” and somehow QE3 will “work”, then follow the markets INITIAL reaction.
Check out this chart…
Higher beta, more cyclical names – XLB & XLI (Materials & Industrials) have outperformed XLU & XLP (Utilities & Staples) by a wide margin since the announcement at 12:30PM yesterday.
Bonds declined (driving yields higher), while Oil & other economically sensitive commodities increased.
If QE3 will work – and bring real growth (& jobs) back to the economy – then cyclical/higher beta/risk names should continue to outperform.
However, if you think history will repeat itself, and QE3 will follow the paths of QE1 & QE2, then I would fade this outperformance.
I think you have to agree that on a marginal basis QE has helped with jobs, GDP growth and most other metrics to help the economy grow. However, has it brought enough growth that cyclical / material names should outperform? I don’t think so.
The Federal Reserve’s OWN consensus puts 2013 GDP under 3%.
Even if you’re convinced that QE3 was the right move, I don’t think you have an argument to say that it will bring a real recovery to the economy.
What QE3 will probably do (if QE1 & QE2 is any indication), is drive the price of hard assets (especially Gold & Silver) higher, and continue this amazing phenomenon of “hunt for yield”.
I’ve written posts warning that it’ll end badly, and it probably will.
Analyzing Annaly - on m-REITS.
Treasuries are bubbling – on long term bonds.
Blue Chip Utilities = Red Portfolio? - on high yielding blue-chips.
The risks outlined in those posts have all become greater and extended, sort of like extending the dot-com crash from 1999 to 2000.
Bonds, although down the last couple of days, I think will revert higher, driving yields lower as people realize that reflation is a long-shot.
Oil is bit more complicated. While the Dollar might fall, the price of Oil has many more variables. One of the most important being growth of developed economies.
The “hunt for yield” caused by #ZIRPforever should bring continued demand to high yielding junk bonds, REITs, & high yielding blue chips (Staples & Utilities), while the sub-par growth in the economy should cause cyclical names to underperform.
Although all hard assets should do well, Gold & Silver (acting as currencies) should probably perform best.
- MicroFundy
