Despite today’s pullback in the gold market, gold lease rates are flashing a bullish signal.
Ending QT Is Not QE
By Bill Fleckenstein President Of Fleckenstein Capital
March 14 (King World News) – The market was a little weaker through midday and it lifted a bit in the afternoon to close roughly flat.
Away from stocks, green paper was decidedly the flavor of the day, fixed income was lower, and the metals were thumped, with silver losing 1.75% to gold’s 1%, while the miners were weaker as well. I assume the proximate cause for that was the bounce in the dollar.
QE, -T, and A
I would like to tackle the topic of the market rally, where it may fail, QE, and QT, as I keep getting questions on those topics…
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To be clear, the views I have shared in the past have not changed. I believe that QE, both here and in other countries, caused markets of all stripes to levitate, be it stocks, bonds, real estate, art, wine, etc. I also held that the absence of QE would cause those markets to buckle. What I never knew was whether it would take the mere prospect of no QE or full-blown QT to do that.
As we were going through that process I stated the same thought repeatedly: that I had no idea how long it would take for the absence of QE or QT to matter, because this “experiment” had never been tried before. We found out last year that QT was having an effect, but it didn’t really effect the U.S. stock market in a material way until last fall. Nonetheless, we did get the data point that QT actually mattered.
Hair of the Dog
I believed then — and still do today — that markets cannot rally significantly without more QE. The absence of QT is not QE. Stopping or slowing the withdrawal of liquidity is nowhere near the same as adding new liquidity, particularly since so much was deployed and markets were moved so far. Thus, I have felt that the rally that has been under way in the stock market since Christmas Eve would run out of gas and fail. I have no idea at what level or when, but my view is that QE and QT are all that really matter.
However, I am currently not actively fighting the stock market, although I do have a few small short positions, as I have discussed. When I am convinced that the rally has failed for real, then I will likely be more active on the short side.
Known Unknowns
I have stated many times that I think people have lost sight of the power of QE and, by extension, QT, simply because this mania has gone on for so long, and the questions I am getting from readers illuminate that fact. It seems that the action in the market is so mesmerizing, it trumps any thoughts about what precipitated it.
We will obviously find out if my grand thesis is correct, but I hold very strongly to it and until I am convinced I am wrong, I will continue to, although, as I say, I am not putting up much money yet because I already know that I don’t know what the timing will be.
Included below are two questions and answers from the Q&A’s with Bill Fleckenstein.
Gold Lease Rates Bullish
Question: I saw a great chart today on Gold Lease Rates and how the 2 Month Rate was approaching 2.0. The significance being that the last time it went over 2.0 was October of 2008, just before gold took off. The next highest reading was around 1.6 at the end of 2015, just before gold exploded 30% higher. Now close to 1.75, that may give your more anxious readers hope that gold’s next leg higher is most likely just around the corner. My question is do you put a lot of stock into Implied Gold Lease Rates in terms of timing for gold?
Answer from Fleck: “It is a sign of physical tightness, which is almost always bullish. It is not a guarantee of higher prices, but it is a constructive development.”
QT & QE
Question: Fleck, You have stated repeatedly that markets can rally appreciably from here only if the Fed resumes quantitative easing (QE). But why can’t markets move significantly higher if the Fed merely stops quantitative tightening (QT) and assumes a neutral policy stance? Real rates remain negative. Moreover, if it quits its balance sheet runoff near current levels (as it is signaling that it may do), then the Fed will effectively leave multi-trillions of dollars printed out of thin air in the system. Prior to the past 10 yrs, these conditions would have been viewed as highly accommodative for market speculation. If the Fed moves to the sidelines, why isn’t there more than enough stimulus remaining in the system to propel stocks higher?
Answer from Fleck: “QE was free money that boosted markets to the moon… QT is the opposite of that, the withdrawal of free money. The absence of QT is still not QE, and I don’t think the markets can continue to rally just because QT ends. The money that was already printed has already had its impact, it can’t continually keep boosting markets.”
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