BTIG’s Mike O’Rourke has made the provocative case that the Fed never intended for a $1 trillion QE program, which is somehow what the market has come to expect, and that the communication surrounding this program has been a disaster.
Here’s another problem: Because of the QE obsession, it’s become the focus of the entire world, distracting from improving fundamentals:
The most frustrating aspect is that on a global level, the entire focus is on QE. For example, the September Retail Sales report on Friday was excellent. In addition, there were solid upward revisions to August. In the past, we have noted that we like to look at Retail Sales ex Gasoline. Lower gasoline prices are bullish for the economy and higher ones are bearish, thus it is a conservative exclusion to make. For example, headline Retail Sales peaked in November 2007, but then remained at that level for the next 6 months. The early deterioration in underlying Retail Sales in the first half of 2008 was masked by gasoline prices rising when Crude went to $150. With this report released Friday, Retail Sales ex Gasoline have recovered to levels of early 2008 and are now within 1.6% of the November 2007 peak (Chart 1). Developments like this and the solid earnings reports so far are quickly overlooked as the focus remains overwhelmingly upon QE. The lack of clarity by Central Bankers has created the wrong incentive structure in the market. Legitimate positives are developing as the economy exits its soft patch. They are easily overshadowed by the incredible momentum fueling the QE trade simply because it is perceived to be “easy.”