Archive for the ‘Quantitative Easing’ Category

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Forever Blowing Bubbles

Friday, May 17th, 2013

“I’m forever blowing bubbles,
Pretty bubbles in the air
They fly so high, nearly reach the sky
And like my dreams they fade and die.”

                                     From “Forever Blowing Bubbles”

Bubbles are everywhere, according to Bill Gross, aka The Bond King.

According to Gross, there’s a bubble in Treasuries, a bubble in narrow credit spreads and a bubble in high-yield prices.  The stock market appears to be in a bubble, too.

The problem with bubbles is that we won’t know we’re in one until it pops.  And when it pops, it’s too late to do anything about it.  A bubble can cause all sorts of problems, as you may recall from the dot-com bubble in the ‘90s and the housing bubble in 2008.

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Posted in Bonds, Investing, Quantitative Easing, The Economy, The Federal Reserve Board | No Comments »

Ben, the Great and Powerful

Friday, March 22nd, 2013

“Bernanke said, in essence, that he wasn’t a magician.”

                                                    Heidi Moore, The Guardian

The number one movie in America today, “Oz, the Great and Powerful,” could be a metaphor about The Federal Reserve Board and its role in the American economy.

Oz, a likable scoundrel, is a master of illusion.  There is no substance behind his tricks, but they give the illusion of strength, and, since people believe what they want to believe, he is able to overcome the forces of evil.

Likewise, Fed Chairman Ben Bernanke’s prestidigitation relies on quantitative easing to create the illusion of strength.  All appears well when the stock market rises and the unemployment rate drops, even if there is no strength behind the market’s rise and the drop in unemployment is by only 0.2%.

Of course, the U.S. Bureau of Labor Statistics has its own illusionists, as we’ve pointed out in the past, who are able to make a 14.4% unemployment rate look like a 7.7% unemployment rate.

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Europe – The Weakest Link

Friday, February 15th, 2013

With the election, sequestration showdown and other pressing domestic news, we’ve hardly had time to think about Europe.  Yet the continent is as troubled as ever and is crying out for attention again.

Keep in mind that, in this era of a global economy, our fates are intertwined.  Europe and America are heavy trading partners and our multinational businesses are located throughout each other’s continent.  Our banks own European bonds.  So when Europe is in trouble, so is the U.S.

Well, Europe is in trouble.  We’d say “in trouble again,” but it’s never really gotten out of trouble; at least not since Greece triggered the sovereign debt crisis.  The popular British game show, “The Weakest Link,” could serve as a metaphor for the whole continent, except that what’s happening in Europe is not nearly as entertaining.

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Posted in Eurozone, Germany, Gross Domestic Product, Quantitative Easing, Sovereign Debt, The Economy | No Comments »

The Incredible Shrinking Economy

Friday, February 1st, 2013

Only in today’s America would a shrinking economy cause the stock market to rise.

The federal government reported this week that the U.S. economy contracted by -0.1% in the last quarter of 2012. That helped the stock market finish its best January performance since 1994, with the Dow Jones Industrial Average up 7% since November (it was the best performance since 1989 for the S&P 500).

As the chart shows, S&P 500 performance since November has been eerily similar to last year’s performance at this time.

So why did a shrinking economy produce a rising stock market?  Because it all but guarantees more quantitative easing (QE), as well as resistance to federal spending cuts, which would reduce gross domestic product (GDP).

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The End of QE?

Friday, January 11th, 2013

The Fed’s quantitative easing program has been like that endless tub of popcorn or vat of soda that those with large appetites buy at the theater.  It goes on and on, but at some point, enough is enough.  Are you really ever going to refill that?

The Federal Reserve Board has gorged on bonds for years now and some board members are finally losing their appetite for continuing, according to minutes from the last meeting of the Federal Open Market Committee.

The supersized QE3, the third round of quantitative easing, was supposed to continue until the unemployment rate dropped to a reasonable number.  The only problem is that buying bonds doesn’t produce jobs.

Even accounting for Storm Sandy’s impact, job growth remains stalled, with the unemployment rate stuck at 7.8%.  While the rate is significantly lower than it was in 2009 (9.9%), it is nowhere near the 5.0% rate of 2007.  More troubling, much of the rate drop is due to people either dropping out of the workforce or taking low-paying part-time jobs.

That doesn’t mean that quantitative easing is without consequences.  The sudden nervousness of some Fed members reflects the fear that buying $85 billion in Treasuries and agency paper will destroy the dollar.

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Posted in Ben Bernanke, Bonds, Inflation, Quantitative Easing, The Economy, U.S. Debt, Unemployment | No Comments »

It’s A Correction for Nasdaq, Russell Indexes

Friday, November 16th, 2012

Stock markets have become increasingly bearish since the election.

With the fiscal cliff approaching, and little confidence that Democrats and Republicans will agree on a solution to avoid it, the Nasdaq Composite Index, which includes many technology stocks, and the small-stock Russell 2000 Index are now in correction territory.

A bear market takes place when the market drops 20% or more.  A correction takes place when the market drops 10% or more.  Both indexes are down more than 10% since reaching highs in mid-September.

As The Federal Reserve Board’s quantitative easing drove investors to put money in riskier assets, both indexes soared earlier this year.  Since the third round of quantitative easing (QE3) began, though, both indexes have been heading down.

While Republicans agreed immediately after the election to accept some increase in taxes, President Obama has said that he will seek $1.6 trillion in tax increases, which is twice what he previously suggested and is far off what Republicans are willing to accept.

In addition to being driven down by the fiscal cliff, markets are being depressed by continuing turmoil in Europe, and the economic slowdown and change in leadership in China.

QErased

Until recently, markets were heading up, driven higher by quantitative easing programs in Europe, as well as the U.S.

Noting that quantitative easing was no longer having a positive impact on the markets and that, in fact, the market spikes it caused were starting to ebb, we shared the following chart with clients in our monthly letter.

The “Draghi Spike” refers to European Central Bank (ECB) President Mario Draghi.  The “FOMC Spike” refers to the U.S. Federal Open Market Committee, led by Fed Chairman Ben Bernanke.

The S&P 500 is now within striking distance of the low end of the Draghi spike, at which point any gains from the latest rounds of quantitative easing will have been erased.

This outcome is no surprise.  As with government stimulus spending, the positive impact of quantitative easing is temporary.  In addition, each successive round becomes less effective than the previous round.

It wouldn’t matter if quantitative easing had no other impact, except to boost the stock market, but that’s not the case.  It also encourages risky investment and can cause new problems, such as inflation.

And it really does nothing to heal a sick economy.  It’s like drinking alcohol to relieve stress.  It hides the problem, rather than addressing it.

The latest quantitative easing program was supposed to help ease unemployment.  That seems not to have happened.

Neither stimulus spending nor quantitative easing have had much of an impact on the economy.  So what do we do now?

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Posted in European Central Bank, Quantitative Easing, Stock Market, The Federal Reserve Board | No Comments »

Set Our Markets Free!

Friday, September 21st, 2012

In the not-too-distant past, the stock market rewarded entrepreneurs who worked hard and had innovative ideas.

Today, the market is driven primarily by two things:

  • Monetary policy.  The Federal Reserve Board’s quantitative easing programs drive stock prices higher by making other securities less attractive.
  • Computers.  High-frequency trading (HFT), which is conducted by proprietary trading desks at big banks and private hedge funds, uses computers to make trading decisions and execute trades based on perceived pricing inefficiencies.

These two factors already dominate the market, but they are becoming even more dominant.

This past week saw Japan join the U.S. and Europe in seeking to jumpstart its economy with an asset-purchase program.  The U.S., of course, announced QE3 last week and that announcement was preceded by a European Central Bank (ECB) announcement of a round of bond buying that Zerohedge.com called “an act of desperation.”

It used to be that company fundamentals drove share price.  Well run companies were rewarded with higher share prices.  Now, political appointees and computers determine share prices.

The key to improving employment and helping the economy is simple – set our markets free!

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Posted in Computerized Trading, European Central Bank, High-Frequency Trading, Quantitative Easing | No Comments »

Going For Broke

Friday, September 14th, 2012

So The Fed is “all in.”  QE3, the third round of quantitative easting, will continue until the unemployment rate drops to an acceptable level.

The implication is that buying bonds will improve the unemployment rate, which has been over 8% for a record 43 months.  Yet if unemployment remained high after QE1, QE2 and Operation Twist, why should QE3 be any different?

The unemployment rate, of course, is bound to drop sooner or later.  When it does, will The Fed take credit and claim that QE3 is the reason?

Granted, this round of QE is different from the others, as The Fed will be buying $40 billion worth of mortgage-backed securities a month.

Added to existing bond buying, that will come to $85 billion a month through the end of the year.  If unemployment doesn’t drop, the Fed said it will buy even more bonds!

So we’ve come full circle since 2008, when the financial system nearly went bust by … investing in mortgage-backed securities.

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Posted in Ben Bernanke, Job Creation, mortgage-backed securities, Quantitative Easing, The Federal Reserve Board | No Comments »

Consumers Might Spend – If They Had Any Money

Friday, September 14th, 2012

Bond buying will pump money into the economy and reduce long-term interest rates, which are already at historic lows.

Theoretically, this will give consumers a greater incentive to spend their money now.  Or it would, if they had money to spend.

The Fed announcement comes on the heels of a Census Bureau report that annual household income fell in 2011 for the fourth straight year to $50,054, which is the level it was at in 1995.

In addition, of course, many Americans are currently living off of their unemployment benefits.  As we reported, many Americans have given up looking for jobs.  The deficit between the number of jobs created and the number of jobs shed exceeded 200,000 in August alone.

While the reported unemployment rate dropped from 8.3% to 8.1% in August, if those who are underemployed and those who have stopped looking were included, the real unemployment rate would be about 19%, according to The Wall Street Journal.

And, of course, bond buying will increase inflation.  Many Americans, who are barely subsisting, will need to find a way to spend more on food and gas.  So, tell me again, how is this helping the middle class?

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Bernanke’s “On the Other Hand” Speech

Friday, August 31st, 2012

To the disappointment of many on Wall Street, and to the relief of many in the real world, the Federal Reserve Board did not announce a third quantitative easing program (QE3) today.

But Fed Chairman Ben Bernanke did not rule out a QE3 in the future.

Op-ed writers and politicians are often criticized for taking an “on the other hand” approach, in which they combine criticism and praise in the same commentary or speech.  Of course, Mr. Bernanke is not an op-ed writer, but his highly anticipated Jackson Hole speech today would certainly qualify as an “on the other hand” speech.  Both supporters and opponents of ongoing monetary easing could find plenty to like – and plenty to dislike – in what he had to say.

Consider a few excerpts from Reuters:

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Sounds like QE3 is coming!

“Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.”

Oh, wait … I guess we don’t need it.

“ … the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”

Yes, there will be a QE3!

” … the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally.”

Well, no … I guess not.

Also of interest, he says that, “It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs.”

Keep in mind that Congress has not passed a budget in three years.  On the other hand:

“However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.”

So there will be no QE3 now.  On the other hand …

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