vrijdag 20 september 2013

QE As Far As The Eye Can See

I don't think we will ever see a taper again and here is why. One simple chart.

As you can see the 10 year treasury yield is now at 3% and surprisingly, this is almost as high as during the 2008 financial crisis, where the yield was 3.6%.

But there is one big difference between then and now and that is that the U.S. public debt has doubled from $9 trillion to $17 trillion. As a result, interest payments as a percent of GDP have gone up.

So today we are worse off as compared to 2008. To keep yields down I don't see any other option than QE to infinity.

There is this question on how long QE can continue to raise equity prices. Do you think this can go on till infinity?

Of course not, first off, I showed with the Potemkin anti-rally that the Dow Jones hasn't been rising along QE. But more importantly, we need to watch what the U.S. dollar is doing.

That's why I made this chart to show the Dow Composite Index, weighed to the U.S dollar index ( blue line). You can see the blue line has been flat lately, even though the Dow Composite went up ( green line). That's because the U.S dollar has been going down recently (TWEXMMTH). The red line shows the expanding Fed balance sheet.

We need to keep monitoring this, because once the green and blue line diverge from each other, we're basically going into hyperinflation mode.

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