Tag Archives: QE2

The Curious Case of the Obama Economy

Your humble blogger was distressed by this little ditty from Reuters yesterday:

Thu May 5, 2011 2:18pm

Oil plunged more than 8 percent on Thursday, heading for the third biggest daily drop in dollar terms on record, as concerns about economic growth and monetary tightening spurred a sell-off in commodities.

U.S. crude tumbled below $100 a barrel in heavy trading volume after weak economic data from Europe and the United States fed concerns that have battered commodities all week. German industrial orders fell unexpectedly in March while U.S. weekly jobless claims hit eight-month highs.

…Crude oil is selling off sharply for two primary reasons: QE2 is coming to an end in June and without a QE3 behind it, it will take liquidity out of the market, hurting risky asset classes such as commodities,” said Chris Jarvis, senior analyst, Caprock Risk Management in New Hampshire.

Wow, that sounds pretty bad.

And yet a mere 18 hours later, Reuters published this:

Fri May 6, 2011 10:15am

U.S. private employers shrugged off high energy prices to add jobs at the fastest pace in five years in April, pointing to underlying strength in the economy, even as the jobless rate rose to 9.0 percent.

…U.S. stock index futures extended gains, while U.S. bond prices extended losses. The dollar rose further against the euro and yen.

The unemployment rate has dropped a full percentage point since November and the latest rise will strengthen the Federal Reserve’s resolve to stick to its ultra-easy monetary policy stance.

The Fed last month signaled it was in no hurry to start withdrawing its massive stimulus for the economy, even as other major central banks around the world have begun to raise interest rates.

I consider myself well versed in finance, but there are some things about this I cannot figure out. How did Ben Bernanke change his mind overnight? Is oil going down because of a strong dollar or a troubled dollar? And if Wall Street finance gurus are the ones who messed up everything in 2008, then why do we keep taking their opinions as gospel?

Can someone help me out here?



Rigging Wall Street Part II: Why the Fed’s Plan Hinders Hiring

Last week the Fellowship explored how the Federal Reserve’s QE2 strategy is designed to pour wealth into the stock market. Next we discuss what that means for unemployment.

As discussed before, low interest rates pull money out of savings accounts in search of profit elsewhere. From the investor’s point of view, an investment account full of expensive stock means newfound hope for household wealth.

But what does that mean for companies? Simply put, if they want to cooperate with the Fed’s strategy, they have to do their part to keep those stocks valuable. Investors can be persuaded to buy some stock initially, but it won’t stick if the shares don’t keep any value. Thus the Fed is pushing this from both sides: investors drift toward stock, companies pad the value of that stock, and more people come around.

How do companies make stock more valuable? By hoarding money behind it. This simple diagram explains something liberals seem unable to grasp:

To see this in action, look no further than Lowe’s home improvement stores. Today the company announced a surge in earnings thanks to snow shovel purchases and repairs from ice damage. When asked what it would do with the extra money, the company discussed plans to – wait for it – make its stock more valuable:

On a conference call to discuss its results Wednesday, Lowe’s didn’t mention dividends, but it said it plans about $2.4 billion in share repurchases this year. At the end of November, Lowe’s said it plans $18 billion in buybacks through early 2016, or an average of $3.6 billion a year, which at today’s prices would buy back over half its currently outstanding stock. It also targeted a dividend that’s 35% of earnings, up from about 30% currently.

Translation: it will reduce the number of slices in the pie and then pay bigger bonuses to those who still hold the remaining slices.

That’s what companies are doing right now. When genius reporters at USA Today complain about companies sitting on extra cash, they stir up their readers into anger that these companies refuse to spend the money on hiring more workers. And very few in the media report both sides.

General Motors was able to launch its IPO last November (which liberals cheered as its only way out of bankruptcy) precisely because it limited new wage spending and stockpiled enough value to make the stock attractive.

Companies have no motivation to spend the money on anything else. Yes they could grow and open more stores and hire more people, and in a few years that would make them richer – but the Fed doesn’t want them blowing through that money when there’s a crisis to solve right now.

And so we live in a Catch 22. Building a strong stock market pressures companies to put off expansion. This will boost consumer confidence and get people to spend more… which will somehow get companies to expand eventually.



Why the Fed is ‘Rigging’ the Stock Market

While the Dow Jones average continues to defy impossibility with its astronomical highs, Americans are starting to wonder why the mood on Wall Street is so far removed from real life everywhere else.

Two things must be understood.

Number one: ask any reporter on the stock market beat and they’ll tell you the mood in New York is really no different from yours. Brokers are edgy, cautious, and living one day at a time. Many of them are quick to admit “equity markets have been artificially stimulated by ‘so much tape and glue from the Fed, Treasury, White House, and Congress.'”

In other words, they are watching the market get artificially pumped up before their very eyes and they are powerless to stop it.

Number two: this is being caused mostly by low interest rates.

Reuters explains:

The driving force behind the rally is the money that poured into riskier assets like stocks in the last quarter of 2010 after the U.S. Federal Reserve pledged to keep interest rates low.

Low interest rates are typically thought of as way to encourage affordable borrowing. That’s the line most often used by liberal economists – less oppressive interest means more people will borrow and banks will gladly extend the “cheap” credit.

And yet that hasn’t happened. Mortgages remain stagnant, companies are not borrowing for growth, and no new jobs are being created. The Miami Herald reported Sunday that small businesses are still only getting loans through government programs.

So if easy borrowing is not the real goal, then what is? Propping up the stock market.

Bernanke hinted at this in November 2010:

Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

While low interest rates mean less interest on your mortgage, they also mean lower interest you earn on bonds or savings accounts. And there is the rub; who would stockpile money in the bank if it earned zero interest? Who would feel rushed to pay off a mortgage or car loan if the payments are minimal?

The economic laws of gravity kick in, and money naturally flows wherever it can profit the most. Consumers ditch the savings account for greener grass elsewhere. And thanks to a little prodding from the Fed, the most appealing place to store your money these days is corporate equity.

The market looks hot, the media say Wall Street is booming, consumer confidence goes up, and people start spending more. Investment accounts are full of expensive shares. Household wealth appears to overcome debt, maybe even an underwater mortgage. Economic crisis solved.

Six months after QE2, this is finally starting to become mainstream knowledge. And sites like The Economist are worried whether it will work.

As for the Fellowship, we have our doubts as well.