This document provides a summary and analysis of the end of quantitative easing (QE) by the US Federal Reserve. It discusses three possible scenarios for how the end of QE may play out: 1) steady economic growth allows the Fed to raise interest rates gradually in 2015; 2) weak economic growth forces the Fed to postpone rate hikes; and 3) the Fed acts more rapidly to pop potential asset bubbles. The document also reviews past Fed actions, debunks myths about the effects of QE, and notes that other central banks like the ECB and BOJ are expanding their own QE programs to offset the Fed's tapering.

1. Adios QE
24 Sept 2014
War Room

2. HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
Product UpdatesScenario Updates

3. Market Update
Fed Hijinks Scenarios
Past Fed Action
QE MythBusters
Adios QE

4. HiddenLevers
MARKET UPDATE

5. Market Update
Syria Airstrikes
Manufacturing = 5y high
New Era for Chindia
sources: HiddenLevers, MarketWatch, BusinessWeek, Huff Post, Washington Post, Reuters
Gas = 3 bucks

6. Macro Snapshot
Jobless claims at 2006 levels
Are jobless claims signaling a peak? Commodities suffer despite industrial rebound
(hint: it’s the dollar) – meanwhile S&P is middle of the pack among global indices.

7. FED HIJINKS SCENARIOS
HiddenLevers

8. Review: End of QE Scenarios
Not Sure
Easy Money,
No Hangover
Good
Economy
Back on Track
Bad
Deflation
Strikes Back
WHAT REALLY
HAPPENED
66% priced in based
on SPX at 2200. This
becomes the GOOD
scenario now.
Scenario priced in
10y target = 3%
S&P target = 1900
10y = 2.54% headed
down. Commodities
in deflation, Equities
+ GDP not so much.

9. GOOD: Steady as She Goes
source: HiddenLevers, WSJ, Bloomberg, NY Times
Fed raises rates in mid-2015 as stated
EU rate cut
gives Fed
breathing room
US
manufacturing
hitting its stride
Fed has kept its
word on
2014 QE taper
Low inflation
means no need
for rate squeeze
Fed balance
sheet still
bloated
until 2020

10. BAD: Rate Hike Postponed
Weak economic
growth might
force Fed to
postpone
Equities caught
between easy
money and bad
growth
Poor global
growth +
deflation are
catalysts
Fed waits until 2016 due to economic malaise
source: HiddenLevers, NELP, New Yorker, MarketWatch
Rates continue
downward drift
of 2014
Yellen watching
labor market
like a hawk

11. UGLY: Fed Pops Bubble
Yellen said Fed is
prepared to use
rates to pop
bubbles
Low VIX and
corporate bond
spreads
worrisome
Worry is
more about junk
bonds than
equities
Failure of labor
market recovery
makes this
unlikely
sources: HiddenLevers, USA Today, NY Times, ThinkAdvisor, SeekingAlpha
QE withdrawal or pre-emptive rate hike backfires
Goldman thinks
impact begins
when taper ends
Acknowledged
that low rates
led to housing
bubble
Acknowledged
froth in
tech/biotech
sectors

12. Scenario: Fed Hijinks
Good
Steady as
She Goes
Bad
Rate Hike
Postponed
Ugly
Fed Pops
Bubble
If economic
recovery continues,
the Fed can stay the
course and the
present rally may
continue into 2015.
If poor economic
growth causes the
Fed to postpone
hikes, weak growth
and continued
easing might offset
each other.
Investor sentiment
might shift if the
Fed acts more
rapidly. Stocks,
bonds, and real
estate could suffer
in a bubble pop.

13. HiddenLevers
FED ACTION
$

14. 2014 QE Wind Down Plan
Step 1
Remove last $15B of QE
next month
sources: Federal Reserve Releases, Yellen Conference Transcript
Key Takeaway
No Fed governor sees
rates reaching old 5%
levels … ever
Step 2
Rate hike mid 2015
(1.27% fed funds target)
Step 3
Normalize Fed Balance
Sheet “by end of decade”

15. Past Fed Action: Reaction
UGLY scenario:
Fed Pops bubble
Period Fed Funds Change
(bps)
S&P Change
(%)
12/65 – 12/66 +165 -12.2%
8/67 – 9/69 +540 -0.5%
4/71 – 9/71 +185 -9.35%
3/72 – 9/73 +749 -2.75%
3/74 – 9/74 +304 -32.39%
2/77 – 5/80 +1300 +11.44%
8/80 – 7/81 +1007 +0.34%
1/82 – 3/82 +241 -7.01%
3/83 – 9/84 +294 +8.97%
2/87 – 11/87 +133 -18.97%
4/88 – 4/89 +323 +18.49%
2/94 – 3/95 +300 +7.19%
4/97 – 5/97 +19 +10.46%
7/99 – 7/00 +174 +8.23%
6/04 – 8/06 + 425 +14.66%
S&P reaction
Max Drawdown:
-32.39%
Max Rise:
+18.49%
Average Change: -0.22%
source: Business Insider

16. similarities differences
Correct Analogue = Feb – Nov 1987
sources: HiddenLevers, Federal Reserve, St. Louis Fed, Time Magazine
dramatic increase in program
trading, now called HFT
market spooked by interest
rate hike rumors (1984-85)
brand new fed chair in office
overvalued stock market (P/E)
Then - rates rising globally
Now – nope
Then - USD declining
Now – USD rising
Then - inflation concerns
Now - nope
Then - Fed Funds rate 7.3
Now – 0.0
P/E ratios
1987: 18
2014: 26
technical resistance

17. HiddenLevers
QE MYTHBUSTERS

18. QE Myth:USD is getting weaker
sources: HiddenLevers Charts
Despite a steady rise in the US money supply, the dollar is getting stronger. Falling
velocity of money means new money doesn’t cause deflation or devaluation.
Reality: USD is getting stronger

19. QE Myth: Rates are Rising
sources: HiddenLevers
QE 1
QE
2
QE 2.5
(Twist) +
QE3
Reality: Rates dropped Post-QE 1, 2 and in 2014

20. QE Myth: QE is Ending
sources: Wall Street Journal, Wall Street Journal
Info on ECB QE and Rates
Bank Deposit rates reduced to -0.1% in
June 2014.
Further cut to -0.2% in September
ECB new asset purchases will increase
balance sheet 700 B to 2.7 trillion Euros
ECB likely to expand QE
Info on BOJ QE program
First case of QE done by Japan to fight
deflation in early 2000s.
Recent QE began April 2013 and
expected to double money supply.
In addition to bonds, domestic ETFs also
purchased (1 B USD) beginning Aug 2014
Reality: QE outsourced to Japan + Europa

21. Adios QE – Recap
S&P rising + Lower rates
make an odd couple
INTEREST RATES ARE NOT RISING
1987 analogy is about rate cycle, not
just stock market crash
Global factors have given
Fed breathing room

22. HiddenLevers Use Cases
data center
10y/CPI/PMI
scenario
Global
Deflation
Adios QE
macro theme
Strong Dollar
scenario
Fed Action

23. Product Update
I just love
these guys
Dude,
check out that
new look
New site coming in early October