Home > Uncategorized > 2012/08/08: QE is the Opiate of the Perma-Bulls part 1a

2012/08/08: QE is the Opiate of the Perma-Bulls part 1a

© 2012 ROHR International, Inc. All International rights reserved.

While Part 2 will be forthcoming soon, there are some developments which warrant immediate review due to the market focus highlighting them into tomorrow. For anyone who has not already read it, you might want to review our post from Thursday for some key points that we expand upon below. Also note that our general skepticism over the central banks’ ability to reinvigorate economic health purely with liquidity expansion is not a recommendation to sit short of equities at any particular point. Timing and risk management are still essential, and right now the equities are trading well technically.

That said, we seem headed for the next critical phase either later this week or by the middle of next week. And much of it relates to the same sorts of things reviewed in our discussion last Thursday: problems in Europe and relative health of China, even if the US Fiscal Cliff dilemma seems (incredibly) off the table with Congress out for a five week summer break.  

As noted in previous analyses, Europe is now being ceded a “benefit of the doubt” grace period on the inference that ECB President Draghi will be ready to move forcefully if Spain and Italy get German approval for European Financial Stability Facility (EFSF) support. That is typically a 3-5 day hiatus from bearish sentiment, and may even last a bit longer this time given how close they seem to something more substantial than previous efforts.

However, that only plays into our previous concerns over whether crisis mitigation and/or liquidity expansion amounts to anything that actually restores robust global economic growth. While the bulls use the prospect of various forms of Quantitative Easing (QE, ultimately the ‘Bernanke Put’ and now the ‘Draghi Put’) as an excuse to move money into equities, there is a far more important real world influence late this week.

That comes in the form of…



…the economic data out of Asia on Thursday along with the Organization for Economic Cooperation and Development (OECD) Composite Leading Indicators (CLI.) While its growth has been slowing markedly for months now, there are those who still believe that China is going to stabilize and resume more vigorous growth from current levels throughout the second half of this year. Not the least of those believers is the Reserve Bank of Australia.

It was most interesting that it’s “no change” interest rate decision on Tuesday was accompanied by a statement that not only observed conditions elsewhere, but made a specific prediction. As our highlights point out, in a world that will only see average (to possibly below-average) growth in 2012, they have noted that growth in China “…does not appear to be slowing further.”(!?)

They were willing to state that in spite of the observation that the continued weakness in Europe is a risk factor; and exactly the sort of thing that could still dampen Chinese growth. With due respect for Australia’s unique position as a trading partner China and the rest of Asia, this would seem to be a blatant exercise in ‘talking their position’. If this was anything more than upbeat sentiment, why cite Europe as a potential fly in the economic ointment when it is so blatantly weak as to impugn the original assertion?

And to the degree data rather than central-bank psychology might drive the equities trend in the near-term, the major economic focus swings around to Asia Thursday into Friday along with the OECD CLI. Those include Thursday’s Australia Employment report and extensive Chinese inflation, Industrial Production and Retail Sales data. Thursday also brings an atypical midweek release of OECD Composite Leading Indicators. The latter are more important than usual after the recent downturn for most countries in the last release; especially the USA.

Friday brings the Japanese Domestic Corporate Goods Price Index and Industrial Production as well as Chinese Trade figures. Much as with the German Trade figures earlier today, more than just the Trade Balance is important. It has been the repeated case of late that positive trade balances have been cooked up through the canard of lower exports offset by even more restrained imports. In other words, there has been a weak overall indication for international trade.

All of which relates to some aspects of last Thursday’s original installment of this perspective, including an excellent Short View column by James Mackintosh on the three key dangers that the equities are ignoring at present… much like they ignored the US debt ceiling debate last year until it was too late. Those are the imminent bankruptcy of Greece, US fiscal cliff, and the extent of the Chinese slowdown. The online version of that column at ft.com also contains a video that includes graphs and additional discussion beyond the short analysis in the column.

It is still worth a look if you have not already seen it. And it points up the importance of the ‘Asia Factor’ over the next couple of days.

General Market Observations

The September S&P 500 future ability to hold not much worse than the violated 1,375 resistance highs (now support) is important in the near term; even if the 1,350-55 area remains the more prominent historic congestion. It is also important in the near-term that any pullbacks since Monday and not drop back below 1,385-90 short term support; including last Friday’s 1,389 weekly Close. As noted on Monday, the whole central bank “doing something’ euphoria was likely worth a retest of the low 1,400 area resistances already seen yesterday and today. Those include the early May 1,399-1,402 DOWN Closing Price Reversal (CPR), and in case that has overrun there are both September contract and June (lead contract continuation) contract rally highs back on April 2nd at (respectively) 1,411 and 1,417.50.


These are simply the direct influence from, or counterpoint to, the equities strength which has been so glaringly apparent when the September S&P 500 future gapped above 1,375 on the Regular Trading Hours opening last Friday. That has variously caused the September T-note future to drop back below 134-00/133-24 even if there is further significant support down in the 133-00 area. No secrets in the US Dollar Index either on the push up to a retest .8350 when the equities were weak last Thursday only to drop more than a full point on the equities push to a new high for the current rally. And even if the euro is still problematic on its EUR/USD recovery stalling at the low end of the 1.2450-1.2500 range, the commodity currencies have predictably benefited very nicely from the renewed equities optimism.

It is all still ‘of a piece’ insofar as a more buoyant equities market encouraged by crisis relief is being interpreted as a sign of better global economic activity to come. Is that real? We shall see, and especially so tomorrow with that next release of OECD Composite Leading Indicators.

Thanks for your interest.


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