QE 4, 5, 6, 7, 8, 9, 10 …

Why didn’t we think of this?

For years, we’ve been criticizing the Federal Reserve Board for buying too many bonds, keeping interest rates too low, boring us with talk about “macroprudential supervision” and doing precious little to actually help the economy.Fed Pyramid

We’ve also been critical of the federal government, state governments, municipal governments, foreign governments, U.S. consumers and U.S. corporations for carrying too much debt.

But, until now, we failed to put the two together.  The Fed loves to print money.  Governments love to spend it.  So maybe the problem isn’t that the Fed has been printing too much money – the problem is that the Fed hasn’t been printing enough money to keep up with government spending.

The Global Slant blog suggested that the Fed initiate a fourth round of quantitative easing (QE 4) and print enough money to pay off the federal debt (as well as the writer’s debt).  But why stop there?

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Prozac Nation

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

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Forever Blowing Bubbles

“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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Blame It on Sequestration

President Obama and the Federal Aviation Administration blamed recent flight delays on sequestration.  Now the Federal Reserve Board’s Open Market Committee is blaming sequestration for the poor performance of the U.S. economy.

Both claims are equally frivolous.

As The Wall Street Journal noted, “The FAA’s all-hands furloughs managed to convert a less than 4% FAA budget cut into a 10% air-traffic control cut that would delay 40% of flights. The 6,700 flights that the FAA threatened to force off schedule every day is twice as many delays as the single worst travel day of 2012.”

With members of Congress among those affected by the flight delays, Congress acted with uncharacteristic quickness and approved a bill to revoke FAA’s politically motivated furloughs.

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It’s A Correction for Nasdaq, Russell Indexes

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. read more

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Consumers Might Spend – If They Had Any Money

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. read more

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Stock Rally Built On Wishful Thinking

“This is the most disrespected rally I’ve ever seen.”

John Buckingham, Al Frank Asset Management

Stock prices have rallied and are closing in on their highest level in five years.  After six consecutive weeks of gains, the Dow Jones Industrial Average is up 9.7% since early June.

Any increase in stock prices is, of course, good news.  But the market rally has little to do with market fundamentals.  It’s not due to improved corporate earnings, higher employment or other economic news.

The market has been rallying based on the belief that The Federal Reserve Board will approve another round of quantitative easing. read more

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Is Everybody Happy?

Forget about growth in GDP, the unemployment rate, inflation, stock prices and all things relevant to money.

Federal reserve Chairman Ben Bernanke suggested this week that happiness should be used to measure the country’s economic strength.

According to Bernanke, economics isn’t just about money, it’s also about understanding and promoting “the enhancement of well-being.”  We’re not sure how or whether “well-being” can be enhanced, but it’s probably a good thing that measuring happiness is about as feasible as measuring a person’s thoughts. read more

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Dog Days Not So Slow

Another near-miss “flash crash,” more European craziness, buzz about more action from The Federal Reserve Board and a stock market that rises along with the unemployment rate … who says things slow down during the summer?

Goodnight, Knight?

Whenever a terrorist is caught, it’s natural to have a queasy feeling and wonder what would have happened if the terrorist had not been caught.  Worse still is the fear that maybe the next terrorist will succeed.

Knight Trading’s runaway algorithm last week caused a similar reaction.  Wednesday opened with heavy trading in 150 stocks.  Fortunately, the glitch was traced to a rogue algorithm fairly quickly (but not quickly enough).  Such algorithms are programmed to buy or sell stocks based on certain criteria.  The rogue acted more like a day trader than a Knight trader. read more

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Pretzel Logic

When Fed Chairman Ben Bernanke said recently that he did not expect The Fed to initiate any additional monetary stimulus, apparently stock traders weren’t listening.

The recent run-up in stock prices was based on conjecture that The Fed would respond to the still-weak economy with major action – perhaps yet another round of quantitative easing.

Instead of announcing quantitative easing, though, the Fed announced the expansion of Operation Twist on Wednesday. Under Operation Twist, which is designed to lower long-term interest rates to stimulate borrowing and investment, the Fed has been selling $400 billion of short-term bonds and using the funds to buy longer-term securities. read more

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