Fed’s QE1, QE2 Failed! So Will QE3 Says Schoenberger

Jeff Macke

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Having dropped relatively sharply for the prior two trading sessions, stocks looked ready to give up the ghost completely during the trading day on Tuesday. Going into the final hour, the S&P 500 was down 1.5% and threatening to break below 1,330. Just as things were getting sloppy, stocks found their footing and reversed sharply. From 3:20 p.m. to the close at 4:00 p.m. the S&P gained 10 points to close with a run-of-the-mill 0.7% drop.

As usual, the Wall Street sewing circle had already pegged the catalyst: Jon Hilsenrath had struck again. The WSJ reporter and unofficial Fed mouthpiece was set to report that Bernanke and Co. were frustrated with the pace of the economic recovery and growing ever closer to another round of Quantitative Easing.

Cynics were quick to note the frequency with which such leaks occur, and Bernanke has all but made "I'm ready to stimulate" the official slogan of his tenure. The real questions are why traders keep buying into the same rumor and when, if ever, is this Pavlovian cause and effect going to cease. According to Todd Schoenberger of The BlackBay Group, traders just can't help themselves.

"Traders want QE3, 4, and 5 right now, because we know that earnings aren't going to support this market," says Schoenberger in the attached clip. "There's nothing else out there as far as a bullish catalyst."

But another round of quantitative easing isn't particularly bullish either, if it's actually deployed."QE1 and 2 was a failure, QE3 will be as well," he states.

The idea of stimulus has a Keynesian appeal, but if rates were the problem, the economy would be humming. The US 30-year Treasury currently yields 1.4%. There is no business owner on earth waiting for rates to drop even more before they borrow money to expand. With revenues flat-lining, corporations are more inclined to sell assets than they are to build new ones.

According to Schoenberger, the cure for what ails the economy is a sense of teamwork that's seldom seen in the "us-against-them" environment that's fast becoming the theme of this decade. He longs for something with the power to "get everybody together and improve the sentiment — get everybody growing, and get everybody working."

Until we get that sense of goodwill, the economy will struggle and traders will keep playing the range. In terms of asset support, the Fed can only leak rumors of another round of QE before it becomes more background noise to be ignored. Schoenberger and others on the Street would rather Bernanke draw the line and let the free market work its magic before the U.S. gets on the hook for bailing out Europe as well.

Once Americans stop looking to the Fed to bail them out, maybe they'll start looking to one another. It's a long shot, but it's better than running the economy via reporter.

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