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Bond and Stock Market Volatility Is Collapsing Post-QE3


If history is any guide, investors getting long that trade are flirting with disaster.

The velocity of money and the loan-to-deposit ratio are positively correlated. When the loan-to-deposit ratio falls, so too does velocity and vice versa. Bernanke knows that in order to increase economic activity and thus employment, he must get velocity moving again. To do this, he must incentivize banks to raise their loan-to-deposit ratio in order to get credit moving in the economy instead of sitting idle in securities.That is what I believe is the true target of QE III, not raising stock prices.

Nevertheless, the conspiracy theorist perma bears are convinced that Bernanke is targeting stock prices and they are capitulating left and right. Last week, the bearish contingency lost two of their biggest heroes as both Nomura's Bob "the Bear" Janjuah and Gluskin Sheff's David Rosenberg threw in the towel, attributing QE III as the catalyst.

Here's Bob the Bear getting stopped out of his August end-of-the-world-is-coming short call as cited in FT Alphaville:

We are four S&P closes away from being stopped out on the bearish call outlined in my August note. It seems.. that we were wrong to believe that central bankers would not become so "political"...

The S&P traded at 1425 on the day my August note with its 1450 S&P stop was released, the extraordinary central bank actions of the last few weeks has resulted in a very small hit to our year to date. As said, however, my stop loss will be triggered on this Friday's close if the S&P is still above 1450...

Real-world risk takers/investors may choose to exercise any such stop sooner but I will wait/accept the risk. But to reiterate, if the S&P closes above 1450 on Friday, the bear call of August is closed and initially at least I'd choose to go flat/neutral on a tactical basis.

He will wait and accept the risk of not having actually shorted the market at 1425, just advising you to do so because he didn't believe central bankers would be political. He's been wrong for the entire rally, and now at the top, he wants to blame easy monetary policy? That's asinine.

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