‘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.