According to Bloomberg or CNBC, QE3 or not to QE3, that is the big question? I actually do not even have a clue what they are on about. Surely it cannot be that complicated. Due to high political backlash, Bernanke is coming in under the radar, so I wouldn't expect any formal signals that QE3 is on the way. Having said that, he seems to be doing a "bloody great job" (Australian slang) fooling the majority that QE3 has not started yet. What do I mean by that?
For those who haven't "got it" yet, for a central bank to keep interest rates extremely low for "an extended period", it will have to interfere and intervene into the bond market again and again to suppress the rates. You cannot just say rates will stay at 0% and vuala... they stay at 0%. That means, in a certain sense, Bernanke has already pledged to start QE3 and majority of people don't even know it yet. In my opinion, this whole thing has nothing to do with fighting deflation - which doesn't even exist anyway, but has more to do with bailing out Wall Street bankers - not that I want to sound like a conspiracy theorist... but fuck, I hope everyone has figured it out by now!
Bernanke's buddies will now be able to borrow from the Fed at 0.2% interest over 2 years (2 Year Note), which is actually less than the 3 or 6 month LIBOR rate, and lend that money out to us consumers at over 2% for the 10 year period. The savers will be wiped out, while bankers will rebuild their balance sheets. This is a classic scam! In other words, Bernanke has told the Wall Street casino players, who work at the banks, that they have prescily two years left to repair their own balance sheet and you have to be dumb dumb dumb not to make any money under the these casino rules, with the Fed backstopping the financial collapse.
Deflationist will argue that this won't work, but they haven't yet figured out who they are dealing with. They should go back to the speech The Bernank wrote in 2001, pledging that if its necessary he will drop Dollar bills out of the Helicopter. I guess super bears and perma-deflationist just love being bearish all the time!
Back to market matters...
I had quite a few posts on the blog telling me that classic sentiment indicators like AAII, Investor Intelligence and a few others are not as bearish as they should be. That is true, as we can see from the chart above. The only "buy signal" I got this week was from NAAIM and also from the Corporate Insiders (last two weeks).
I have to admit, it is quite strange after a 20% crash. I remain in cash for the majority of my portfolio, but I am turning more and more bullish as I think majority of the volatility and price declines are behind us. That is not to say that we cannot make a new low or something similar, but I think if you haven't shorted the market back in July, you have now missed out. Consider the following chart:
I ran a stock market crash analogue with all the major panics in the last 25 years, which including 1987, 1990, 1998 and 2011. These aren't just any bear markets, but full blown straight line down waterfall crashes. Unless you believe that we are going to have a 1987 or even a 1929 repeat, you might be on the wrong side of the trade being bearish.
Obviously this is just an analogue correlation and not the ultimate holy grail indicator, but whatever does happen, I think majority of the bad news has already being discounted as the market got extremely oversold (chart above). At one point we had over 95% of all stocks within the S&P 500 at oversold level. While we aren't at the bottom yet as I expect a re-test or two or even a bear trap (lower low reversed quickly), I have to admit that we are damn close. Opinions?