On CNBC on Monday morning, a portfolio manager talking his book said that since the Bernanke Put is alive and well, he is remaining long term bullish. He is not alone. After three years of rigged markets, portfolio managers have been trained to remain long term bullish on stocks and bonds. From March 2009 QE1 levitated stock prices by about 50% through April 2010. Then after stocks dropped 20%, from April through August 2010, the Fed announced QE2. That popped stock prices another 40% before peaking in April 2011. Then after stocks dropped another 20% the Fed announced QE3, except they called it Operation Twist. This time around stocks rose just 30% before peaking in April this year. However, stocks are currently only down 4% or so from April this year. Therefore, I do not expect another round of QE until stocks drop another 15% from here.
Three times the Fed has bailed out stock holders. QE1 stocks went up 50%. QE2 stocks went up 40%, QE3, or Operation Twist, stocks went up 30%. You see the trend, each QE does less for stock prices.
Yet you can also see why portfolio managers pray to the Bernanke Put. But if everybody already believes that the Bernanke Put will save the market, what happens if it does not? What if after the next QE is announced stocks do not even go up by a 10% gain before peaking? What will happen to those portfolio managers if the Bernanke Put dies?
Let us imagine that after stocks drop another 15% or so, the Fed wire-- A.K.A. Wall Street Journal Reporter and unofficial Fed spokesmen Jon Hilsenrath-- reports that the Fed is likely to do another round of easing. I would expect stocks to pop maybe 10% over a few weeks. But what happens if that is it? After all, other than the Fed actually buying equities, how can lowering mortgage rates or interest rates further boost the economy? Particularly since very few qualify for either a new or refinanced mortgage. Yes, Wall Street bond traders will make some big bucks on the next Fed rigging. But after three prior rounds of easing, I doubt that Round 4 will pop the stock market by even 10% this go around.
While the next round of quantitative easing might boost stocks a bit at the start, another QE will do nothing for the weakening U.S. economy. Our real time data is discouraging. The key metric we track is the U.S. Treasury's daily release of withheld income and employment taxes paid by the employers of the 132 million Americans with payroll jobs. Withholding analysis tells us that nominal growth in wages and salaries has now slipped below 3% year over year over the past few weeks, down from a 4% year over year growth rate the first part of this year. However, adjusted for lower gasoline prices, wages and salaries after inflation is unchanged. But it is the pre inflation nominal number that is key here. What is going on? In my opinion, the U.S. economy is starting to contract in line with what is going on in Europe and the emerging world.
Back in the U.S., portfolio managers had been hoping and praying that what earlier this year looked like rapid economic growth was real. It was not. Earnings season starts now and I expect that most damaging part of the earnings releases will be depressing future guidance.
If most investors expect the Bernanke Put to save their butts, then they probably are fully invested. That means they have no new bucks to support stocks. Remember, my fortune teller friend did say recently that the Black Swan destined to kill the Bernanke Put is already aloft and stalking.