Archive for the ‘Quantitative Easing’ Category

Good Market Rigging vs. Bad Market Rigging

Friday, April 4th, 2014

“The markets are rigged. … These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.”                                                                                                                                      Michael Lewis

Based on the Federal Reserve Board’s actions of the past five years, you may have thought that “market rigging” was a good thing.  After all, a great deal of wealth has been created from the Fed’s bond buying – although, granted, almost all of it went to those who were already wealthy.

But suddenly, high-frequency trading is being charged with rigging the markets and it’s creating a bit of a furor.  Apparently the Fed is responsible for good rigging and HFT is responsible for bad rigging.  Consider this week’s HFT-related news:

  • Michael Lewis, author of Moneyball, was interviewed by “60 Minutes” in advance of publication of his book, Flash Boys, in which he makes the case that HFT rigs the markets against the small investor.

  • There was the heavy backlash from those who disagree with his conclusion … that is, the people who make money off of high-frequency trading.  Supporters contend that HFT has created liquidity and reduced the cost of trading for small investors.  In other words, the market is rigged against small investors, but it costs them less to make a trade.  Yippee!!
  • Then there’s The Wall Street Journal’s announcement this week that HFT is being investigated by the FBI – not the Securities and Exchange Commission (although it is participating in the investigation), the FBI.  You know, the guys who investigate bank robberies, money laundering, drug cartels and the Mafia.  And now you can add high-frequency trading to that list.  Apparently, insider trading was already taken. (more…)

Translating Fedspeak

Friday, March 21st, 2014

While the week’s biggest news has taken place in Russia, Ukraine and China, it’s the news out of the Federal Reserve Board’s Federal Open Market Committee that’s most in need of translation.

The Fed regularly uses language that no one understands, because if America’s taxpayers really knew what’s been happening, they’d totally freak.  Keep that in mind and proceed with caution as we attempt a translation of Fedspeak from new Chair Janet Yellen’s first press conference:

“ … the FOMC’s outlook for continued progress toward our goals of maximum employment and inflation returning to two percent remains broadly unchanged.”

The dots are moving and we’re not achieving the results we expected, but you won’t hear it from me. Yellen 2

“Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging.”

The economy still stinks, but we’re going to blame it on the weather.

The unemployment rate, at 6.7 percent, is three‐tenths lower than the data available at the time of the December meeting.  Further, broader measures of unemployment such as the U6 measure, which includes marginally attached workers and those working part‐time, but preferring full‐time work, have fallen even more than the headline unemployment rate over this period.  And labor force participation has ticked up.

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Fundamentally Flawed

Friday, March 14th, 2014

Imagine if the outcome of a football game depended more on the weather than on the talent of the players.

Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome.  When it is the primary factor, anything can happen.  In such cases, would you put money on the game?

The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.

In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.AUDJPY

Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead).  Yet other world events may replace QE in determining the performance of the market.  That means potentially greater volatility than we’ve experienced in the easy money era.

It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading.  Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.

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Mission Not-Quite Accomplished

Wednesday, February 26th, 2014

Remember when the announced goal of quantitative easing (QE) was to reduce the unemployment rate to 6.5%?

It’s now 6.6% and heading down.  So can we expect QE to finally end?MW-BS355_CIVPAR_20140110090655_MG

Not really.  While new Fed Czar Janet Yellen talks about continuing tapering, many believe that tapering will stop and some believe she may reverse direction and increase the rate of bond buying.  Even if The Fed continues to cut back bond purchases by $10 billion a month, it will still take more than six months for QE to end.  Minutes of the Federal Open Market Committee’s January meeting, which were released this week, suggest that the final taper would take place in October 2014.

More specifically, the minutes say, “Several participants argued that, in the absence of appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting.  That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.”

Tapering aside, does anyone really think the unemployment rate is really decreasing?

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The Neverending Story

Thursday, February 13th, 2014

Why change?

It’s been more than five years since The Federal Reserve Board began its quantitative easing program.  We’ve had QE, QE 2, Operation Twist and the never-ending QE 3.  The Fed’s portfolio of bonds exceeds $4 trillion and it now owns more than a third of all bonds issued by the U.S. government.

The net result of this never-before attempted experiment in easy money policy has been a still slumping job market, growth around 2% vs. a non-QE average of 3.3% and a drop in personal income of 4.7% since the “recovery” began.  At least there hasn’t been any deflation.

Yet new Fed Chair Janet Yellen announced this week that she’s “staying the course,” continuing QE maybe forever.  Although she said she plans to continue tapering, too, she added that the bond buying program is “not on a preset course,” so perhaps The Fed may taper its tapering, creating an untapering by buying even more bonds.

After all, $65 billion a month doesn’t buy what it used to, even with today’s low rate of inflation.

The market reacted positively, with the Dow Jones Industrial Average jumping nearly 200 points.  Once again, just as it looked like the market was reacting to real business conditions, the Queen of QE proved that the market is still firmly under the Fed’s control.

What Ceiling?

Remember “The Neverending Story?”  The book, which was made into a movie, takes place in a fantasyland, in which a dark entity called “The Nothing” threatens to consume everything.  In the neverending story of QE, “The Nothing” could be The Fed itself, consuming every bond in sight, or the federal government, consuming everything and casting a pall of new regulations that threaten job growth and recovery.

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No Records This Month

Friday, January 17th, 2014

Markets go up and markets go down, so maybe it’s not surprising that January’s stock market performance has less exuberance to it than the performance to which we’ve become accustomed.

As of yesterday’s market close, the S&P 500 was down 0.13% year to date, which is not a big deal, especially considering that the S&P 500 Index finished 2013 up 32.4%.  Even with the recent downward trend, the S&P 500 is up 25.35% for the past 12-month period.

The Dow Jones Industrial Average has been a bit creakier, down 0.96% year to date, but still up 21.51% for the past year.

It’s doubtful, then, that the markets will break any records this month.  But if you believe the hype, good things are headed our way.  The unemployment rate has slimmed down to 6.7%, gross domestic product (GDP) was revised upward to 3.6% for the third quarter of 2013 and, with Janet Yellen’s appointment to head the Federal Reserve Board, quantitative easing can continue ad nausem.

So why worry?

To begin with, as we explained last week, the falling unemployment rate is an illusion.  The rate dropped only because so many people have stopped looking for work.  The number of non-working Americans exceeds 102 million, which is a record.

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Some Recovery

Friday, January 10th, 2014

The government’s stimulus programs are not working and neither are a growing number of Americans.

In October, we noted that the number of Americans not working exceeded 101 million, setting a record.  But records are made to be broken and the number today is even higher – even while the official unemployment rate continues to drop.

When we wrote in October, the U.S. Bureau of Labor Statistics (BLS) reported that 90,609,000 Americans who are 16 or older were neither working nor looking for work.  Since then, the number has increased to 91,808,000.

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But that number doesn’t include unemployed Americans who are looking for work, which was 10.4 million in December, bringing the total number of Americans who are not working up to more than 102 million.  That’s an addition of nearly 1 million since October … during what has widely been viewed as a period of economic recovery.

The civilian labor force fell from 155.3 million to 154.9 million in December, bringing the labor participation rate down from 63.0% to a 35-year low of 62.8%.

While the BLS expected 197,000 jobs to be created in December, only 74,000 jobs were created.  That’s a miss of more than 100,000 jobs.  The BLS says inclement weather affected the number of forced part-time jobs being created.  “Forced part-time” jobs are those where a former marketing manager who has been out of work for two years runs out of money and takes a position working the deep fryer at Wendy’s because there are no other options.

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Paper Taper

Friday, December 20th, 2013

So the taper begins in January.  Big deal.

That was the market’s initial reaction anyway.  In fact, the market viewed this week’s announcement as a positive, setting yet another record.  Conversely, when Fed Chairman Ben Bernanke first brought up the possibility of a taper in May, he sent the market reeling.  So talking about buying bonds has a greater impact than actually buying bonds.  Who knew?

Some believe the stock market rallied because The Fed made it clear that it will remain accommodative and that interest rates will remain near zero until the apocalypse.  That being the case, though, why did bond yields soar?  Go figure.Taper Impact

The taper announcement is not a big deal, though, because everyone knew it was coming – everyone except for the economists whose job it is to tell us when tapering is coming.  First they guessed wrong that it was coming in October, then they guessed wrong that it wasn’t coming in December.  Keep that in mind when you hear them tell you the economic benefits of more bond buying and more government spending.

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Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.

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When Common Sense Is Senseless

Friday, December 6th, 2013

What was I thinking?

Over the past couple of years, I’ve preached caution.  Corporate profits were down and unemployment was up.  The economy wasn’t growing, but the federal debt was.  Iran was developing nuclear capabilities while the entire continent of Europe was going bankrupt.  And investors were still shell shocked from the 2008 financial meltdown.

Not a good time to invest in stocks.  Not a good time to invest, period.  Common sense dictated restraint.Bungee Jumping

And the federal government’s answer was to spend as much as possible, while printing more money and buying more bonds than at any time in history.  After record stimulus spending and $4 trillion in bond buying, common sense would suggest high inflation and a sagging stock market; a good time to invest in gold and other hard assets.

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