QE3 Not As Likely As The FOMC Minutes Make It Seem

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 |  Includes: QQQ, SPY, UDN
by: Paulo Santos

Yesterday the FOMC minutes led to considerable speculation that the FED might already bring QE3 to the table at its September meeting.

I believe that in spite of the minutes, the probability of this happening is lower than it seems. Unless the stock market tanks before the meeting, that is.

I have two reasons for my beliefs:

The first, is that the FED has only ever done QE in response to a stock market crisis

No crisis, no response. QE1 was during 2008's November Crash. QE 1.5 was announced at the market lows during March 2009. QE2 was announced at Jackson Hole during the 2010 summer swoon. Never has a QE been announced when the stock market was already strong.

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The second, is that the minutes refer to a time when the market was different from now

The minutes were from the FOMC meeting which ended August 1. At that point, the market had recovered somewhat from previous weakness, but had not broken out yet and volatility was high.

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Today the market stands at recovery highs and has broken out. It's a different market, with a huge drop in volatility and some clear signs of speculation to boot. It's not a market into which the FED will likely do any QE, especially with real time numbers such as the jobless claims indicating some recovery in the job market.

Conclusion

The stock market's - S&P 500, Nasdaq 100 - positive reaction and the dollar's negative reaction seem to have been influenced by something which in all likelihood won't happen unless the stock market and the dollar actually head the other way.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.