Citi Warns "Fed Is Kicking The Can Over The Edge Of A Cliff"

ZeroHedge

It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi’s FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to “kick the can down the road” it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the “end of the road” at some time in the future and the ‘can’ being “kicked over the edge of a cliff.” Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility – “America is exhausted…..it is time.”

Via Citi FX Technicals,

Small business (the “backbone of the US economy”) is struggling again

These numbers were released this week and give rise for concern. The outlook here does not look very promising as we see all of the charts above starting to look shaky

We are particularly focused on the overall small business optimism index and what it suggests.

Small business optimism index

This chart is very compelling and looks to be following exactly the same path as that seen in 2011 (when QE2 was due to end only to “morph into operation twist”) and again in 2012 (when operation twist was due to end only to “morph” into “QE infinity”)

Important points to note on this chart are:

 

94.7: This was the major low posted in March 2003 (The month that the major rally in the stock market (S&P) began which then peaked in October 2007.That gave us a low to high move of 105%.) Traditional Fed easing ended in June 2003 with the Fed funds rate at 1%.This indicator then rallied to a peak of 107.7 by November 2004. The next time this support was revisited was in November 2007 when it gave way with a “print” of 94.4

 

94.5: This was the high of the bounce off the March 2009 low and was posted in Feb. 2011. The index then fell away and this high of 94.5 was once again posted in April 2012

 

94.4: After another fall away, this index again bounced into a peak of 94.4 in May 2013 and has since moved lower again.

After the break of supports in 2007 the low posted was 81 (March 2009) while we saw levels of 88.1 and 87.5 respectively after the 2011 and 2012 peaks. (The 2011 move took 6 months (Aug. 2011) and the 2012 move took 7 months (Nov 2012)). Operation twist was instituted in Sept 2011 while QE “infinity” was put in place in Sept 2012. If we were to follow the same path then the Fed could well be talking easing bias rather than tapering by the New Year (we hope not)

Overlay of the small business optimism index and the S&P 500

As can be seen from the chart above the Small business optimism index and the S&P were very correlated from 2007-2012. If anything, the Small business optimism index has tended to slightly lead i.e. the business backdrop seemed to reflect the economic backdrop which was then reflected in the equity market.

However, since Sept. 2012 when the Fed went “all in” with QE “infinity” there has been a huge divergence between these two. After an initial “hiccup” of about 9% in the Equity market it has since rallied 32% in 11 months, with no corresponding support from the business index.

There is now a “huge divergence” between the “backbone of the US economy” (Small business) and the Equity market. This clearly shows that while sharp balance sheet expansion at the Fed continues to “elevate” the equity market, it is far from clear that it is providing incremental benefit to the real economy. If these small business indicators continue to deteriorate as we expect then there is likely an inevitable negative feedback loop to the real economy and ultimately employment creation (Which at this point remains “qualitatively poor”)

If the Fed is not concerned about the dangers of creating a potential “bubble” in financial assets that does not see fundamental support, then they should be. They might want to explain what their next policy measure would be IF they allow a financial bubble to emerge while they sit at “Zero bound” short-term rates and a balance sheet likely sitting above $4 trillion.

The Equity market move is fundamental: Yeah right!

continue at ZeroHedge:

http://www.zerohedge.com/news/2013-11-14/citi-warns-fed-kicking-can-over-edge-cliff