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Vol. 29, No. 7d Two Wall Street, New York, New York 10005 • www.grantspub.com april 8, 2011

All together now

In days gone by, recalled James
Bianco, eponymous chief of Bianco
Research, stocks seemed to know
their own minds. Some went up, oth-
ers down. Now they move together in
packs, like teenagers. It’s “risk on” or
“risk off.”
“And the reason they go up together
and down together,” Bianco explained
to the Grant’s audience, “is they share
a common fundamental.” Manipula-
tive monetary policy is that shared
driver.
People used to wonder if govern-
ment operatives were somehow lifting
the stock market. No need to wonder
anymore. “The day after QE2 was ap-
proved in November, [Ben Bernanke]
wrote an op-ed in The Washington Post
and I’ll read the highlight,” Bianco said:
“‘Lower corporate bond rates will en-
courage investment. And higher stock
prices’—again, that emphasis on pric-
es—‘will boost consumer wealth and
help increase confidence, which can
also spur spending. Increased spending
will lead to higher incomes and profits
that, in a virtuous circle, will further
support economic expansion.’”
Looking into the CNBC cameras
late in January, the chairman empha-
sized the point: “The policies [QE2]
have contributed to a strong stock
market just as they did in March 2009,
when we did the last iteration of this,”
he said. “The S&P 500 is up 20%-plus
and the Russell 2000, which is about
small-cap stocks, is up 30%-plus.”
From which it follows that correla-
tions between individual stocks and
the indices in which they are grouped
are near the highest levels since 1926,
and nearly back to the peaks of 2008-
09. “This is a year and a half after the
crisis has ended,” Bianco pointed out.
“Now we all know that, in a crisis, cor-
relations go to one, but we didn’t know
that in a recovery from a crisis, they go
to one as well.”
The relationship between stocks
and bonds, too, has the fingerprints of
the government all over it. Between
1963 and 1997, falling yields were
bullish for equities, rising ones bear-
ish, our speaker proceeded. However,
since around the time of the Long-
Term Capital Management crisis, it’s
been the other way around.
Naturally, Bianco continued, the
central bank makes its mark on com-
modity prices—though not, uniformly,
on all of them. Tallow is among the
humble items that trade without ap-
parent regard for quantitative easing.
Maybe things would be different, Bi-
anco reflected, if there were a tallow
futures contract (“whatever tallow is,”
he muttered under his breath).
The Fed, of course, isn’t the world’s
only money-spinning central bank. In
response to last month’s earthquake,
the Bank of Japan—inventor of the
millennial art of quantitative easing—
proceeded to outdo itself. “They did
more to inject funds into the system
than they did throughout the entire
quantitative easing exercise in the
1990s,” said Bianco. “They have now
taken up their balance sheet almost
250% in two weeks. Boy, does Ber-
nanke look like an amateur when he
looks at what the Bank of Japan has
been doing.”
As for what follows QE2, our speak-
er proposed that it’s already begun.
“I’d argue to you that QE3 already
started with Japan two weeks ago if
you want to be pragmatic about it,”
Bianco wound up. “We will play this
game until it ends with the fear of in-
flation. When inflation gets so high,
then it becomes a big problem for the
Fed because all the stimulus they put
into the market is going to take years
to get out. When the market starts to
worry about inflation, it is going to
want it out by Friday. It is not going
to wait until 2014 when a lot of it is
removed. And it can’t come out by Fri-
day, and that is going to be a problem
for the markets.”
•

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