Federal Reserve Chairman Ben Bernanke has spoken, and to no one’s surprise, the printing of money in America will continue and intensify under the soon-to-be newly launched “Quantitative Easing 4” program, or “QE4.” So now we have had several Federal Reserve programs to keep the flow of money going, and now it looks like there will be more money printing.
Under this aggressive money printing strategy, the Federal Reserve will pursue a more aggressive stimulus strategy in September that will involve the additional monthly buying of $45.0 billion in longer-term treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds under QE3. (Source: Press release, Federal Reserve, December 12, 2012.) The concern is that the additional buying of bonds will add another trillion dollars to the Federal Reserve’s balance sheet in 2013, driving the amount up to $4.0 trillion and keeping the money-printing machine going.
While the aggressive move by the Federal Reserve is needed to make sure the U.S. economic recovery doesn’t falter, many are concerned that the easy money will drive inflation higher. Of course, this has yet to happen, as consumers appear more worried about paying down debt levels than spending. The Federal Reserve suggests it would keep interest rates near zero as long as the unemployment rate hovers above 6.5% and inflation remains manageable.
The market view on the Federal Reserve appears to be unfavorable, based on the initial reaction following the announcement of QE4. Based on the Federal Reserve’s assessment, there’s concern that the U.S. jobs picture and economy may be worse than we expect. “Although the unemployment rate has declined somewhat … Read More
The Federal Reserve is busy looking at what to do next to try to keep the economic renewal on track, as the central bank meets for the last time this year. The Fed also understands its impact will be hindered by the ongoing battle in Congress regarding the pending fiscal cliff.
The Federal Reserve is speculated to continue its third quantitative easing (QE3) program of buying mortgage bonds each month. The effect will see the Fed increase its holdings of mortgage bonds to nearly $4.0 trillion, according to a Bloomberg survey. (Source: “Fed Seen Pumping Up Assets to $4 Trillion in New Buying,” Yahoo! Finance via Bloomberg, December 11, 2012.)
The bond buying has helped to ease financing rates and drive the housing market higher.
The Fed has spent $40.0 billion a month to buy mortgage-backed securities and, in theory, lower the financing rates. The yield on the 10-year Treasury stands at 1.6% versus 1.8% prior to the establishment of QE3—so it’s working.
For the Fed, as the QE3 works its way through the system, job creation is expected to be a major benefactor.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed, despite the unemployment rate falling to 7.7% in November. There are still over 21 million Americans looking for work.
To date, the super-low interest rates at between zero and a quarter of a percent have helped to prevent the country from falling into the abyss. If not for the low rates, the carrying cost of the $16.0 trillion in national debt would be suffocating and making the situation worse, … Read More
Gold bullion has had a fairly volatile year in 2012. At the end of 2011, gold bullion sold off sharply, ending December at a weak point. A lot of this, I believe, was a result of hedge funds being forced to liquidate their positions. Investors in gold bullion should be aware of the flow of funds from institutional investors. Because of the huge amount of capital that institutions have, they can certainly have an outsized impact on any market, not just gold bullion.
Once a fund has liquidated its position, the selling ends and the underlying fundamentals take over. For 2012, we’ve seen further price appreciation for gold bullion beginning in August on anticipation for accelerated monetary policy stimulus (more money printing) from the Federal Reserve.
That is exactly what we got from the Federal Reserve, a very aggressive monetary policy initiative that has no end date. This type of monetary policy action is unprecedented for the Federal Reserve. As is so often the case, investors bought on the rumor and sold on the fact. Following the September announcement for the new monetary policy initiative, a third round of quantitative easing (QE3), gold bullion sold off with the rest of the market.
To be honest, this is to be expected, considering the large move in gold bullion. Nothing moves up in a straight line. Once the markets tested the $1,800 level, considering gold bullion moved up from approximately $1,550, some profit-taking was to be expected. The key question for me was: at what point would investors step back into the gold bullion market?
Chart courtesy of www.StockCharts.com
This one-year chart … Read More
By the time you are reading this, either Barack Obama or Mitt Romney will have won the race to be the 45th President of the United States.
Yet I will remind the winner that there’s not much time to rejoice in the victory, as there’s plenty of work ahead, which will dictate the direction of America over the next four years in relation to debt, job creation, economic growth, and foreign policy.
Whoever has won, they need to work on job creation at a much stronger rate than the current pace. All those promises that were made during the election campaign must now be acted upon. We need to create strong job creation and sustained jobs growth, while lowering the unemployment rate. The Federal Reserve is cautious about job creation into 2013. Obama and Romney have different strategies for lowering the unemployment rate and increasing job creation. But the reality is that unless Americans are put back to work, the economic recovery will likely stall and add to a possible financial crisis.
The most immediate concern for the next president will be what to do about the pending fiscal cliff on January 1, 2013, which calls for $607.0 billion in automatic budget cuts to avert a financial crisis. The Congressional Budget Office (CBO) recently warned that the U.S. economy could contract in 2013 if the spending cuts are allowed, which would impact job creation. (Source: Congressional Budget Office, last accessed November 6, 2012.) I expect the same.
At a round table meeting of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), there was talk of the U.S. … Read More
In a week’s time, we will know who the next President of the United States will be; this will be critical, giving us an indication of where America is heading as far as policy and the impact on the economic recovery. The latest poll by CNN has the race to the White House in a dead heat, with Governor Mitt Romney slightly ahead at 48% of the votes and President Obama at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 48%, according to CNN.
At this point, based on my unbiased view, I don’t really care who wins, but I do want something to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”
Whether you are a Democrat or a Republican, there is a commonality: we need to get the country fixed and get it going on the correct path to the economic recovery and jobs for all. The unemployment rate fell below eight percent in September, but the reading is well below the four percent level we saw in 2006 and 2007. The unemployment rate has improved from the recession high of 10.0% in October 2009, but needs to work its way lower for a sustained economic recovery.
What concerns me is the current lack of focus on the pending fiscal cliff on January 1, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, resulting in automatic spending cuts across the board and tax increases that will threaten the economic recovery.
Of course, there … Read More
In a recent editorial, I talked about QE3 (a third round of quantitative easing implemented by the Federal Reserve) and how it was a reward largely for the upper echelons of income-earners. The middle class will benefit due to the lower carrying costs, but the rich will really be the net benefactors of this monetary policy.
The A.T. Kearney Consumer Wealth and Spending Study writes, “The richest consumers have a higher percentage of discretionary spending, and dominate not only such categories as hotel stays and financial services, but also hospital and outpatient services, as well as newspapers and magazines.”
Let’s not beat around the bush. The reality is that QE3 will help people who carry significant debt to lower financing costs for another three years. The low interest rates mean cheaper cash will be available for the rich to make more money and finance spending, whether this spending is on investments, housing, or other high-cost ventures. This means the rich, with their larger pool of capital, can continue to increase their net wealth at a faster rate than the average American.
A viable strategy to play the QE3 effect is to first determine the benefactors of the policy in the retail sector: we know these benefactors will be the higher-income earners with major disposable income.
A contrarian high-end retail sector play that could benefit from the decision of the Fed to launch QE3 is Saks Incorporated (NYSE/SKS), a seller of men’s and women’s fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. Its most well-known banner is its “Saks Fifth Avenue” (SFA) stores that are free-standing or located in higher-end malls…. Read More
The Federal Reserve has spoken and the rich are applauding.
Don’t believe the Federal Reserve when representatives say the third round of stimulus (QE3) is aimed at helping middle-class America; in reality, QE3 will largely benefit the rich.
Yes, the rich will again get richer, and the Federal Reserve knows this.
Here’s what I mean. Across the pond in Britain, the Bank of England’s monetary policies aimed at making money more accessible (similar to the U.S. quantitative easing) are helping the rich get richer. The numbers show that in the aftermath of the monetary easing in Britain, the value of stocks and bonds have advanced about 26%, and 40% of these gains have, in turn, increased the wealth of the top five percent of British households, according to the Bank of England. All you have to do is think about who gets richer when stocks increase in value—if you guessed the rich, you’re right, and the Federal Reserve is aware.
At last Thursday’s Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced it would maintain super-low interest rates between zero and 0.25% into mid-2015, and it will maintain loose monetary policy even after economic recovery strengthens.
This is excellent, as it will help people who carry significant debt to lower their financing costs for another three years. But guess which class controls the brunt of America’s assets?
In the aftermath of the Federal Reserve announcement, stocks surged, which will largely benefit the top five percent who control the majority of the country’s financial assets.
The low interest rates mean cheaper cash is available for the rich to make more … Read More
In his recent speech at the Jackson Hole economic symposium, Federal Reserve Chairman Ben Bernanke made some interesting comments in regards to monetary policy. Following these remarks, gold moved up strongly, indicating that the market’s interpretation was that the Federal Reserve was indeed going to enact further stimulative monetary policy, also known as quantitative easing #3 (QE3). However, I don’t think it’s clear from the speech or recent events as to why now is the best time to use this monetary policy tool.
On the one hand, the Federal Reserve chairman did outline several reasons not to enact further monetary stimulus. This includes, the text reads, “the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.”
The costs associated with additional nontraditional monetary policy actions by the Federal Reserve are rising and the benefits are diminishing, this we all know. As the Federal Reserve chairman then stated, the bar for using said policies is set higher. So what this could mean is that it takes more stress, such as another financial crisis, to enact further monetary policy action. As of today, we are certainly not in a financial crisis as we were several years ago. At that time, there was a massive liquidity crunch and the Federal Reserve appropriately acted by allowing monetary policy to ease and reduce the stress level. Currently there is no liquidity crunch. In fact, it is the exact opposite: there is more than enough money in the system. Adding $500 billion won’t help increase the velocity … Read More
Despite the weak economic data, stocks found buyers on reports that the Federal Reserve was disappointed with the economy to the point where a third round of quantitative easing (QE3) would have to be initiated. The implication was that there was a chance in August, but September seemed the most likely date for the announcement of QE3.
The market may celebrate the announcement of QE3, but more importantly, how will the economy benefit from QE3? The unemployment rate is high in this country. Did QE1, QE2, and “Operation Twist” improve the unemployment situation when one considers more meaningful measures of unemployment like U6, which is still at roughly 15%? No.
Would money from QE3 find its way into corporations that would get benefits from initiating capital projects and hiring people? No. Will the Federal Reserve’s policy of QE3 find its way into training programs for the unemployed? No.
The talk is that QE3 may target purchases of mortgage-backed securities from the big banks. Would this help homeowners who are underwater with their mortgages? No. Will QE3 make credit easier for those behind on their payments, so they can refinance and actually take advantage of lower rates? No. Will these actions improve the housing market? No.
Corporations are sitting on record amounts of money and can borrow at extremely low interest rates. The problem is that corporations don’t want to initiate capital projects because consumer spending and consumer demand are so weak. Will QE3 make corporations alter their capital project investment decisions, since the Federal Reserve policy will not help spur consumer spending? No.
Manufacturing in the U.S. has been a … Read More
It is fascinating to watch how market pundits will warn everyone that rapid inflation is upon us when interest rates and commodities are rising quickly. Also, most investors are quick to notice when interest rates are rising as well.
Interest rates have now fallen to all-time lows. The U.S. 10-year Treasury note has crossed below its all-time low of 1.8% to where round three of quantitative easing (QE3) will be enacted, in my opinion.
Market pundits are quick to point out that the turmoil in Europe is causing investors to pour into U.S. Treasuries to protect themselves. This is true, but I believe the market is telling us more, if we pay close attention, which is why QE3 is coming.
The Reuters/Jefferies commodities index, which measures a broad basket of industrial commodities, is testing its 2010 low—going back two years. Instead of talking about rapid inflation when the index was threatening to reach multi-year highs last year, this index is signaling deflation, as it is breaking down, laying the groundwork for QE3.
Agricultural commodities are also breaking down significantly—further evidence of QE3. Ben Bernanke began his QE programs because he said himself that he will not allow the U.S. economy to experience the deflationary malaise of the 1930s—the Great Depression. Now that the market is signaling deflation, my contention is that QE3 is very, very close.
If we look at the best performing sectors of the stock market over the last month, they are utilities, consumer staples, and healthcare: defensive sectors. When the market becomes defensive and feels that the economy is slowing, it sells the offensive sectors—technology, consumer discretionary, … Read More
The debate rages as to whether there will or will not be a third round of quantitative easing (QE3). I am in the camp contending that not only will there be a QE3, but also a QE4, QE5 and so on.
The major reason why there will be a QE3 is that the Fed needs to have some kind of GDP growth.
What makes up GDP growth? The first of four main components of GDP growth is consumer spending, which is 70% of the economy here in the U.S. and has been the main driver of growth worldwide before the economy collapsed in 2008.
Since 2008, faced with high debt levels, the consumer has had to repay this debt and so stop spending. Furthermore, real disposable income has fallen, which puts further pressure on consumer spending. It is safe to say that consumer spending levels will not reach pre-2008 levels until debt is paid down and incomes rise.
The second of the four components of GDP growth is business investment. There have been countless stories in the press about how corporations are holding onto a record amount of money on their balance sheets.
The average American and the Fed want businesses to invest this money so that jobs can be created and GDP growth can resume, without the need for QE3.
The problem is that almost all businesses see the indebted consumer with little hope of strong consumer spending. Without consumer spending, they can’t justify investing, because these businesses feel they will create product or services that no one will buy.
Without consumer spending, business investment is hard to justify … Read More