A Zak Mir special on hotel california, Mr Ed “Cajones” and QE’s exit!

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The financial crisis of 2007-8 was a strange affair. Perhaps not so much that it happened, most of us could tell that there was an asset bubble ready to burst, but in the manner of its treatment by the financial authorities.

There was to my mind a very “Big Government” or even Socialist response to the meltdown, something you might understand from the likes of Gordon Brown and his spiteful cohorts (“Balls” I say!!), though not so much from the supposed home of Capitalism, food ‘ol Uncle Same the United States of America.

Nevertheless, the answer on both sides of the Pond was the same: bail out the banks who had caused our collective misfortune (with our own taxpayers’ money), and lower interest rates to zero. The latter strategy was perhaps the first time in living memory that interest rates had been lowered to “help” borrowers who may have overstretched themselves, rather than the usual policy of raising rates to back savers / curb inflation which normally happens at the end of a boom.

So far, so good. With ultra low rates confidence improves, the banks have fantastic margins, and the stock market / real estate can only head one way. Indeed, you wonder why this QE strategy was not tried before? On the basis of this magic policy there would never need to be a lasting economic recession again, and there would never have been one in the mid 70s or early 90s…

But there is just one little problem with QE. It is the exit strategy. How do you engineer a return to normality without causing the type of crash you were trying to avoid in the first place? I can tell you already, there is no safe exit from QE.

This is said even before this week’s latest Federal Reserve announcement on Tapering of QE which is likely to be another $5bn to add to the $10 in December. It is of course also said in the wake of January’s sharp tumble for stock markets around the globe.

QE is a policy which is equivalent to the line in the classic song Hotel California by The Eagles – “you can checkout, but you can never leave.” Presumably, the taking away of the punchbowl analogy which has also been used in the financial media is also appropriate. But put simply, once addicted to QE, markets will not be able to live without it, and we are heading for a nightmare of instability – something which is already panning out as far as emerging markets currencies are concerned. While it may be wrong to exaggerate the effects of a collapsing Argentine currency on the rest of the real economy, we have seen that ahead of tapering investors, and perhaps more acutely speculators, have every reason to press the sell button.

And why not? We now know the Fed’s hand. For the next year it will be trying to taper its QE, so we can be short equities and long the U.S. Dollar. This is not rocket science. Indeed, it seems to be just as much of a gift as shorting Sterling was at the time of the ERM Crisis in 1992, or shorting the Japanese Yen ahead of the arrival of Prime Minister Abe in late 2012. While results for traders may not be as easy as these old examples, at the very least we shall be reminded for the remainder of 2014 why QE is the kind of pact with the devil policy that only the really desperate should choose. It worked in terms of giving us time but now it’s time to pay the piper (no not John!!).

S&P: June Rising Trend Channel

Sharp decline below 50 day moving average at 1,812 suggests 1,750 June price channel floor on its way.

Risk of follow on decline towards 1,702 – the 200 day moving average, which would echo the Dow technical position.

Only sustained price action back above the 50 day moving average at 1,712 would delay the downside scenario.

FTSE 100: August Price Channel Support At 6,460

Recent block at top of August price channel towards 6,860

Bull trap retreat from above former October resistance at 6,819

Lowest “safe” entry point currently at the floor of the 2013 price channel at 6,460 – although further losses cannot be ruled out.

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