Posts Tagged ‘Quantitative Easing’

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.

(more…)

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?

(more…)

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.

(more…)

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.

(more…)

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.

LFPR
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.

(more…)

Bully for 2013 … But What About 2014?

Friday, January 3rd, 2014

2013 markets were full of bull.

The economy continued to sputter along, growing at about 2%, unemployment remained high and corporate profits were mediocre.  Yet the S&P 500 index rose a staggering 29.6%, its best performance since the go-go-days of 1997.

So what sort of bull drove this bull market?  The Federal Reserve Board’s quantitative easing (QE) program, high-frequency trading and exuberant investors who shifted into stocks with renewed confidence.

Investors Intelligence SurveyWhen Fed Chair Ben Bernanke hinted in May and June that The Fed might start pulling back on its bond buying soon, the market initially fell and interest rates rose.  But ironically, rising rates drove investors out of bonds and many invested further in stocks, pushing the market even higher.

More Bull in 2014?

As 2014 begins, the bullish sentiment continues.  More than 60% of those surveyed by Investors Intelligence are now bullish and the bull-bear ratio is at a record level of more than four.

Bullish sentiment at this level is typically a good thing, though, as high investor enthusiasm typically leads to a drop in the market.  When investors are at their most bullish, that’s when the stock market usually drops.

(more…)

Century Old Fed Has Inflationary History

Friday, December 27th, 2013

With the Federal Reserve Board celebrating its 100th birthday, it’s a good time to look back on the past century to see how The Fed has fared.

We’ve been critical of The Fed’s quantitative easing program, but that accounts for only the past five years of Fed history.  How has it fared in the previous 95 years?  Overall, has its work improved life for Americans or has it been a negative force?Inflation

The Fed’s role is to ensure the safety and soundness of financial institutions, stability of financial markets, and equitable treatment of consumers in financial transactions.  But its activities are primarily focused on using America’s money supply to manage inflation, unemployment and interest rates.

If The Fed has performed its job well, America’s standard of living should be greatly improved today when compared with, say, 1938, when the country was still recovering from The Great Depression.

But MyBudget360 made some surprising discoveries when it compared 1938 prices with today’s prices after using the U.S. Bureau of Labor Statistics inflation calculator to adjust for inflation.

(more…)

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.

(more…)

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.

(more…)

Taperphobia Hits Wall Street

Friday, November 22nd, 2013

A taperphobia epidemic has Wall Street in a panic yet again.  “Taperphobia” is an irrational fear of common sense.  Symptoms include a falling stock market, soaring bond yields and ongoing anxiety attacks.  There is a cure, but it’s expensive – it costs at least $85 billion a month, but that’s enough to cure all of Wall Street and send the stock market soaring.

Taperphobia was discovered by Federal Reserve Chairman Ben Bernanke in May, when he invented a new definition for the word “taper,” using it to describe the gradual slowdown of quantitative easing (another phrase he invented, which translates to “buying bonds forever”).Philly Fed

Symptoms of taperphobia subsided through calm reassurances of ongoing bond buying to eternity, but they returned in October, because most economists had predicted with absolute certainty that tapering would begin then.

It didn’t, so taperphobia subsided again.  But now, thanks to discussions by board members included in minutes of the Federal Reserve Board, many believe that tapering will begin soon.

(more…)