Kass: What to Expect When We're Expecting
As I have written, I believe we are at or near the top in world equity prices.
No doubt, quantitative easing produces more liquidity, but the Fed can't control where it goes. To date, most has become banking industry excess reserves, and I suspect some more will be added to reserves. Could more liquidity work its way into the stock market (and into commodity prices)? Of course, this is possible.
More Cowbell Is No Longer a Surprise
So, maybe today will provide some more fuel for stocks. But, maybe it won't, as so many now expect it.
As I wrote, there are some important differences between prior easing and today. For example, interest rates are already rock bottom, economic data points are turning negative, and commodity prices are already high.
To conclude, today QE3 is expected, equity prices and valuations are higher, and importantly, QE is no longer a novel concept nor at the front end of something that can be viewed as having an infinite shelf life. Also, it has been established that, given structural issues, quantitative easing has failed to meaningfully revive the domestic economy -- and most view more easing as waning in influence.
I like Miller Tabak's Peter Boockvar's take this morning:
Does anyone outside of the Fed think that any new policy news today, in the context of already historically low interest rates, will alter the behavior of any lender, corporate CEO, small business or large, or any individual consumer? Will the decision to build that plant, make that loan or buy that car or home be triggered by any new news by the Fed today? I think not.
Today it is almost as if more quantitative easing is being introduced because we are conditioned to it and the notion that it might help stock prices but not have a great impact on economic growth.
I am comfortable saying that, unlike QE1, QE2 or Operation Twist (and its extension), QE3 seems much closer to an end than a beginning. And clearly, the most important thing is that it doesn't appreciably help the real economy and frankly seems to hurt.
Now the Fed is damned if it does and damned if it doesn't. This is what The Fed has pigeonholed itself into with all the jawboning.
And after QE3 is announced, what next?
Unfortunately, from my perch, there is limited economic, corporate profit and capital market profit promise ahead.
In light of my views above, I remain net short.