NEW YORK ( TheStreet) -- Two back-to-back articles on the excellent FTAlphaville caught my eye last Friday.
Net inflows into equity funds ( read the article on FTAlphaville), with various targets globally, hit $22.2 billion in the week of Jan. 9, the highest since Sept. 2007 and the second highest since comparable data began in 1996. "Yes, extreme moves like this are a contrarian indicator," it warned sternly, with a heavy British accent to match the gravity. Citi's US Economic Surprise Index ( read the article on FTAlphaville) is threatening to turn negative after a decent run in positive territory. The graph below shows surprising periodicity and momentum in overshooting zero, perhaps due to the deeply ingrained bias toward linear extrapolation in the human cognitive system.
VIX, at 13.36, closed last Friday at the lowest since June, 2007, the perennial end of Good Old Days. This, really, two months before the debt ceiling, spending cuts and U.S. credit rating come to a crescendo? Over-complacency always makes me nervous. As the first big bank to report earnings, Wells Fargo ( WFC) reported record profit for the fourth quarter. But, as with banks especially, one has to dig beyond the headline numbers. I find three things that are worrisome: lower loan margin, slower mortgage activities and record deposit-to-loan ratio.These are perhaps the clearest evidence that QE is having diminishing returns, as QE squeezes bank's profit margin (by driving down bond yields and loan rates) and the massive injected liquidity is stuck in banks rather than going to the real economy. Even mortgage lending went down from Q3, which was probably the biggest surprise in the whole report. This casts a fresh shadow, once again, on the hope of housing recovery.
As economics blog Confounded Interest pointed out, Q1 GDP forecast has been continuously revised down to 1.5% (see chart below). End of QE just got pushed a little further down the road.