Morgan Stanley Labels QE3 a Flop, Asks for QE4

Last week I wrote about the danger of giving the markets more stimulus as the need for another round of quantitative easing screamed just one thing at me, dependency. And while we got the rush into equities that I like the rest of the world expected, we also got the slowdown once the sugar rush abated. So where does that leave us? As far as I’m concerned, we’re more or less exactly where we were before, just a couple points higher on the Dow or S&P (depending on your preference).
•Initial pop of 100 points on the Dow
•Initial pop of 36 points on the S&P
•Between 9/14 & 9/24 both indexes have traded in a range of less than 200 bips

Clearly it’s too late to judge QE3 in terms of its impact on the real economy, but to feel relief because our central bank just injected more liquidity into the market place would be premature.

Furthermore, if we don’t see tangible economic results and optimistic guidance in the next round of earnings reports, I think the safe bet is to assume we’ll be hearing for more easing. Completely ridiculous? Maybe, but one institution has already put its request for QE4 on paper. In its equity research report published Monday, BB Morgan Stanley characterizes QE3 a disappointment and is lobbying for an additional round of easing.

QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the FED dramatically augment this program before ear-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks.

-MS’s Equity Research Report 9/24/2012

Will others follow MS’ lead or could this just be an attempt to separate itself from the herd and catch people’s attention? Either way it seems irresponsible and right in line with MS’ mode of operation. After all this is the same firm that felt justified in promoting $38 dollars per share as fair value for Facebook’s IPO. How has that work out? Well as of 12:37 pm 9/24/12, NASDAQ was forced to enact a short sale restriction as FB’s price action dropped more than 10% from the prior day’s closing price.

In fairness to Ben, the Fed has no control over the monkeying around that goes on atop the hill and for its actions to be effective, there needs to some sort of resolution regarding fiscal policy. That being said, kicking the can along is no way to fix the economy just as giving a kid a snickers bar for dinner is no way to feed a nine year old. Both will suffer sugar highs, crashes, and will ultimately return to being unsatisfied.

What highs, crashes, and returns to the mean do provide, are excellent opportunities for day traders to trade on heightened volatility. And while day trading is best left to those who know what they are doing, the opportunity exists nonetheless.

 

You and MS do know that boosting asset prices is not the primary objective of QE, right? So why are we judging how well this new program has worked (over the past week) by the bump in asset prices.

The economist had a good article this week discussing the relationship between asset prices and QE3

I’m standing on the edge of some crazy cliff. What I have to do, I have to catch everybody if they start to go over the cliff—I mean if they’re running and they don’t look where they’re going I have to come out from somewhere and catch them.
 
Best Response
HoldenC:
You and MS do know that boosting asset prices is not the primary objective of QE, right? So why are we judging how well this new program has worked (over the past week) by the bump in asset prices.

The economist had a good article this week discussing the relationship between asset prices and QE3

Oh? That's interesting. Did you miss his press conference where he talked about helping home prices rise so that people want to buy a house to earn a return on their investment. Or maybe your missing what the effects of ZIRP policies have on investors at large. It pushed them kicking and screaming into anything with yield. The debt monetization pushes the dollar down and boom, commodities begin to rise as an offshoot of inflationary pressures which normally rear their head in energy first. Moreover, pushing the prices of assets up via inflation or any other measure allows banks and people to stay solvent, which, is the whole goal of all this in the first place. Avoiding bankruptcy by all means and push the problems off further hoping we can eventually grow fast enough to pay down our debts. Initially you could argue that QE was to provide 'liquidity' but god help us we have plenty of that as it stands.

Now, the catch is what MS says there. They talk about boosting EQUITY markets, which are so disconnected from the real economy at this point its a joke. Wanna talk about the ugliness of the situation? Let's talk about the 1.3 GDP print today, rising prices across the board in the face of slowing growth with the added benefit of a stagnating labor market. Oh, and now we are going to buy ~500 billion a year of mortgages to try and create another housing boom to pull us out of this mess! WOOOO! Give me a break. At least we get the wealth effect for a little while longer and Bernanke gets to keep his job.

 

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