Quantitative easing is a monetary policy tool used by a central bank to try and stimulate an economy when the economic cycle is far below optimum levels. Central banks increase the quantity of money in the financial system through quantitative easing by purchasing securities, such as treasury bonds, to increase the price of assets; this will lower prevailing yields and entice investors into other areas that might be more beneficial for an economic rebound. One worry with quantitative easing is that the increase in the supply of money might lead to inflation, or the overall increase in the price of goods.
We all know that central banks around the world have taken a loose monetary policy stance, providing substantial quantitative easing measures to try and revive the global economy.
As I’ve written before, there are many long-term unintended consequences that could arise from such an aggressive monetary policy program. While quantitative easing has reduced the probability of a financial crisis occurring over the past couple of years, this does not eliminate such an event from happening at some point in the future.
One example of the impact of the current monetary policy initiatives is the global hunt for yield. Investors have been piling into all kinds of bonds regardless of the true long-term fundamental merit of the investment. France, as we all know, is suffering from a lack of growth, including downgrades by credit rating agencies. However, this has not stopped investors from piling into French bonds, which are up approximately 12% year-to-date.
Even though the economy is still weak, and there have been no real structural reforms within France to fix the economic potential of the nation for the future, investors have piled into bonds at such a rate that the 10-year French bonds are yielding approximately 1.7%.
I don’t know about you, but I would be more comfortable investing in a country or company that has the ability to grow revenue and run their economy or business efficiently. At this point, France is not that country.
This hunt for yield is one of the side effects of the current monetary policy program. Quantitative easing has pushed investors out of safe investments and into riskier assets. While this is creating … Read More
The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.
The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)
Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.
Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.
In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.
Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.
With … Read More
With the financial reporting season underway, one of the most important considerations is not the most recent quarter’s earnings results, but the earnings outlook companies are giving for the remainder of the year.
One market sector that I like to watch is the retail area that sells to the average American, as this helps give a clear picture of the underlying fundamentals of the U.S. economy.
Family Dollar Stores, Inc. (NYSE/FDO) just released its earnings outlook for the remainder of the year, and it was far below what analysts had expected. In January of this year, Family Dollar offered an expected earnings outlook for fiscal 2013 of approximately $4.20 per share; this has now been reduced to $3.93 a share. (Source: Burritt, C., “Family Dollar Cuts Profit Forecast as Shoppers Cut Back,” Bloomberg, April 10, 2013.)
During the second quarter, Family Dollar reported that same-store sales increased by 2.9%, for stores open longer than 13 months, also coming in below estimates. This company is interesting, as the lower-income market sector is showing continued weakness.
The significant decline for the earnings outlook of each company tells me that all of this quantitative stimulus is doing little to help the average American, as this market sector is not showing any signs of improving.
The lack of job creation and the increase in the number of people pulling out of the jobs market are now having a direct impact on the market sector that caters to millions of people. With continued economic weakness, there is little hope that the earnings outlook will improve anytime soon.
It is actually quite shocking, considering the trillions … Read More
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
Last week, the new governor for the Bank of Japan (BOJ), Haruhiko Kuroda, announced a game changer for that nation’s quantitative easing policies. The BOJ now plans to initiate monthly bond purchases in the amount of 7.5 trillion yen (US$77.8 billion) per month in an attempt to increase inflation to two percent within the next two years.
When it comes to creating an investment strategy based on this quantitative easing policy, there are two initial takeaways. The first is that this will put pressure on the Japanese yen to weaken its value; the second is that stocks will rise within that nation, since many firms are exporters and will benefit from this quantitative easing plan.
This investment strategy has already begun, as large institutional investors have started front-running this announcement, starting with the election of the new Prime Minister of Japan last fall. However, the country is just about to embark on this new aggressive quantitative easing plan that will last approximately two years—if not longer. There is still plenty of time to profit from an investment strategy using this quantitative easing announcement as a catalyst.
The Japanese yen has already weakened, but it’s poised for additional decline with such an aggressive quantitative easing policy. One investment strategy is to consider the possibility of shorting the yen. Recently, George Soros and Bill Gross stated that this quantitative easing policy could significantly push the yen down further than most people believe.
Soros commented, “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then … Read More