Posts Tagged ‘Federal Reserve’

QE 4, 5, 6, 7, 8, 9, 10 …

Monday, April 20th, 2015

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? (more…)

Prozac Nation

Friday, June 27th, 2014

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.


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.


Blame It on Sequestration

Friday, May 3rd, 2013

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.


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.


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?

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?

Stock Rally Built On Wishful Thinking

Monday, August 20th, 2012

“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.

A rally built on wishful thinking is a rally that should be approached with caution.  Investors have, indeed, been cautious, withdrawing $70 billion from stock mutual funds since the year began.  Likewise, trading volume has been low.

With the economy showing signs of tepid improvement, it is becoming less and less likely that The Fed will move forward with another round of quantitative easing (QE3).  And if The Fed does not take action, investors fear that the rally will not only come to an end, but gains based on the potential for another round of quantitative easing will turn to losses.

So what will happen if The Fed moves forward with QE3?  Like QE1 and QE2, it will likely have much, if any, economic impact.  In fact, it’s a given that each round of quantitative easing will be less effective than the one before it.

Like previous rounds of easing, investors could expect stock prices to rise, as quantitative easing makes stocks more attractive relative to other investments.  Except, given that the market has already rallied in anticipation of QE3, announcing QE3 may have little impact at this point.


Is Everybody Happy?

Friday, August 10th, 2012

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.

Of course, there is a Misery Index, which is calculated by combining the unemployment and inflation rates.  The Misery Index hit a 28-year high of 12.7 in June 2011.  It has since dropped to 9.83, but few Americans are dancing with joy these days.

Perhaps Bernanke is hinting that The Fed’s next stimulus plan will be to pass out prescriptions to anti-depressants to all Americans.

Dog Days Not So Slow

Monday, August 6th, 2012

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.

As Dennis Dick, a trader for Bright Trading LLC told The Wall Street Journal, “The algorithm just kept trading.  There are algorithmic errors every day, but they’re caught immediately – this went on for nearly half an hour.”

Think about that.  If algorithmic errors take place every day, how long will it be before we experience another “flash crash?”  You likely remember the “flash crash” of May 6, 2010.  It erased $862 billion of share value in 20 minutes, briefly sending the Dow Jones Industrial Average plummeting 998.5 points.  The age of electronic trading has brought investors many other stress-inducing errors.  The most recent example before last week, of course, was the malfunction on the NASDAQ exchange during the first day of trading.  It certainly isn’t entirely NASDAQ’s fault, but Facebook’s share price has yet to recover.

Doing “Whatever It Takes”

European Central Bank (ECB) President Mario Draghi spurred a rally in late July by promising to do “whatever it takes” to save the euro.  To the financial world, it sounded as though dreams of European bond buying, ala America’s quantitative easing, were finally coming true.  But then the ECB met … and did nothing.

Of course, buying bonds to keep borrowing costs low so that troubled countries can borrow more money at lower rates doesn’t really address the problem, given that spending too much money has been the cause of Europe’s problems in the first place.

Fed Signals

Ending a two-day policy meeting on Wednesday, the Federal Reserve Board made statements that indicate additional stimulus (i.e., more quantitative easing) is in our future.  The Fed said it will “closely monitor” the economy and “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  Based on a Wall Street Journal translation, “The Fed will move if growth and employment don’t pick up soon on their own.”

Unless Ben Bernanke pulls a Mario Draghi.

Unemployment Rate and Market Rise

The good news is that the American economy produced 163,000 new jobs in July, significantly more than the 100,000 predicted.  However, the bar was set low.  There weren’t even enough new jobs to keep up with population growth and jobs being eliminated, as the unemployment rate inched up from 8.2% to 8.3%.  The labor force participation rate slipped to 63.7%, down from 66.4% in 2007, according to the Bureau of Labor Statistics.

As pointed out, there is plenty of confusion about what’s happening in the economy.  The blog noted that the Institute for Supply Management reported that the employment index dipped below 50 for the first time since 2011 (down to 49.3 from 52.3), so “in other words, the employment in the U.S. services sector is now contracting.”

However, this is what passes for good news these days.  The Dow Jones Industrial Average responded with a 217.29 point gain (1.69%), its third largest percentage gain this year.

Pretzel Logic

Friday, June 22nd, 2012

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.

The extension through the end of 2012 added another $267 billion in bond sales. The measure is not very controversial, but an extension is also not likely to be especially effective, given that long-term rates are already at record lows.

Bernanke did not rule out further action. If none is taken, the “fiscal cliff” will become a little steeper.