6/15/2011 1:20 PM ET|
Fed's next move: Stealth stimulus
There's a sense of impending doom in the market as the end of the Fed's QE2 money-printing program nears. But we don't need QE3 -- help is on the way.
Businesses are flush with cash. Financial conditions are calm, with interbank lending rates hitting fresh lows. Inventories are lean. Workforces are stretched. When demand returns after the temporary drag from high oil prices and Japan fade, businesses will ramp up production, investment and hiring.
In short, the ingredients for a re-recovery are in place, as detailed in my June 8 column, "The economy is recovering -- really."
Yet the market chorus is calling for more monetary help from the Federal Reserve -- and was bitterly disappointed last week when it appeared that such help isn't coming. By all indications, Fed Chairman Ben Bernanke isn't interested in a QE3 -- a third round of printing money to buy long-term bonds. The first was initiated in late 2008. The second started last November.
The combination of an economic growth scare and the feeling that the Fed is asleep at the switch has investors on the run. People want a repeat of the rally that ran from September to April, fueled by QE2. They want the caress of more easy money. Like a drug addict looking for the next hit, they fear losing the daily injections of cash into the financial system.
They won't get it -- at least, not in the form they expect. QE3 won't happen because the threat of inflation is too strong.
But that's no reason to be afraid. The economy's slowdown appears to be temporary, and banks are sitting on piles of cash. Just as critically, there's an ample supply of what I've dubbed "stealth stimulus" on the way, thanks to the Fed. That makes this a time to act while others are fearful (at the end of this column, I discuss a couple of plays for investors looking to act).
Stealth stimulus aplenty
Not only does the market overestimate the Fed's willingness to consider QE3, it also underestimates the pace of interest-rate hikes over the next few years. Société Générale economist Aneta Markowska expects short-term interest rates of about 1.25% around Christmas 2012. Wall Street is looking for rates under 0.75%. The evidence of a continuing recovery and rising inflation suggests higher rates are justified.
But that doesn't mean the Fed is done. In fact, by some measures it's ramping up its support of the economy to new and potentially dangerous levels as its stealth stimulus -- the combination of higher inflation and ultralow short-term interest rates -- is unleashed. The result is negative "real," or inflation-adjusted, interest rates -- something that hasn't been seen in a big way since the Great Inflation of the 1970s.
The Fed isn't talking about it, but that doesn't mean it's not there. Negative real interest rates, tantamount to free money to borrowers, are rare, because interest costs are subsidized by inflation. If you've been waiting to buy a car, boat or house, or to invest in a new business or expand an existing one, now is the time. After years of financial retrenchment, households are in a position to start borrowing again -- just as banks ease credit requirements and start lending again.
The cost of servicing debt has fallen to early 1990s levels, thanks to low interest rates. Loan delinquencies are falling. And the savings rate has fallen back under 5% as people regain confidence to spend.
With the borrowing cycle revving up, what was once a check on the economy's growth rate is about to turn into a big catalyst.
Another benefit, especially for the beleaguered banks, comes from the extremely steep yield curve. In plain English, this is the massive gap between short-term and long-term interest rates. Short-term rates are being held down by the Fed's zero-interest-rate policy, which has been in place since 2008. Long-term rates -- which dropped only about 0.5% thanks to QE2 and have since moved higher, with 10-year Treasury yields moving back over 3% -- are well above last summer's lows, as bond traders price in more inflation and economic growth.
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Two great quotes from Milton Friedman 1976 Nobel Prize in Economics about the Fed:
"Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless."
"The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."
He also believed that we would be better served if we replaced the Fed with a computer.
One thing is obvious. America is not short of money. Banks, wall street and big corporations have it locked up.Theyown own our government and they all love slave labor.
If we forced our public owned corporations to pay our minimum wages wherever they go. That alone would help greatly. There are many obvious things that could be done; But, nothing will be done because the pigs own our government. Our obscene wealth and income gap is getting worse.
Our middle class is declining, poverty is growing and the upper 1% takes more and more. This is a sure formula for disaster. We will force change or the pigs and their government will destroy our country. We are headed straight for depression and chaos and our leaders are concerned with banks and wall street..Insane!
What a MORON this guy is!!! Continuing to say the economy is growing...really...while ignoring the instability in the European markets (10s of Billions of dollars of exposure by US Banks), residual and growing unemployment, false inflated "growth" through infusion of worthless cash which HAS TO BE REPAID!!! These drones are employing the Rahm Emmanuel model of "Never let a Crisis go to waste" and "If there isn't a crisis, creat one to further your agenda."
Recovery? This writer does not truly believe we are that blind and stupid, yet he is forced to spin such rhetoric or be fired.
QE3, or any other acronym to keep us diverted from the truth, will not, will never, can never help us out of the economic Mariana-like trench we are in. The world is perched upon a knife's edge and it is probably well that we do not know the particulars. However, heed what you see around you and prepare for an upheaval of the life you once knew.
My background is 45 years in statistics, probabilities, economics, alternative economics and truth. I pray that I am wrong, but the facts before me do not lie.
The problem is Americans keep voting for politicians who tell them that they will create jobs, give them free health care and take care of all their needs while protecting them from the evil rich and large corporations.
It is not the job of the US government to create private sector employment. When our government wastes trillions of dollars that just means that businesses and individuals needs to pay even higher taxes to pay off that new debt on top of the money we already owe.
Our only hope as a nation to avoid eventual bankruptcy is to create an environment in which the US is the most profitable place to produce goods and services. You don't have to be an economist to understand that if it is more profitable and easier to produce something in China or India then companies both foreign and domestic based will eventually all move there. They will have no choice as the lowest cost producer always wins in the long run. After all when we go shopping we all look for the best deal.
How about during the next election we all choose our candidate based on his or her plan to fix the economy. We are all going to have to accept that our government is not going to be able to afford to pay for all of our needs. In order to balance the budget and eventually pay down the debt we are going to have to make serious painful cuts. Our grandparents would have understood, but then again they didn't expect government to take care of them to begin with.
When demand returns after the temporary drag from high oil prices and Japan fade, businesses will ramp up production, investment and hiring.
Not here. Companies have been flush with cash for almost 2 years now. Lending rates have been super low for 2 years.
Neither of those things have translated into real dollars in the street in the US. Sure, there's money flooding into emerging markets.
And again, it doesn't matter if the rate is -20% if banks aren't going to lend to people who actually build things and spend money on capital purchases. If all the negative lending rate is going to do is make financing big business or mega banks easier, all you will see is that money stored away, buying up stocks, or going into leverage bets.
And even then, a negative lending rate isn't going to replace 600 billion in Fed spending.
*And according to your charts, we've had a high yield spread for *YEARS* and negative interest rates for *YEARS* what's so different now?
If you've been waiting to buy a car, boat or house, or to invest in a new business or expand an existing one, now is the time.
If you can get the credit. And if the sellers want your price. A lot of people selling homes aren't taking lower offers. And the amount of information needed for these purchases now continues to dampen. I think it should be that way, money down, proof of all assets, etc. But at the same time that means until the majority of the population is in a better credit position, demand isn't going to take off here in the US.
Overseas, inflation is killing what would be a growing middle class demanding consumption of cars, homes, tvs, mobile phones, etc. It's continuing to cause food budgets to be near 50% of families budgets.
So I simply don't see where the demand is going to come from in such a tight global consumption market. What you're saying would be true.
*If banks bought actual goods, but they don't*
Bank of America (BAC, news) has been particularly hard hit, with shares falling to levels not seen since the spring of 2009.
As a result, valuations have fallen to attractive levels. Bank of America is trading at a 15% discount to tangible book value. Moreover, the analysts don't believe Bank of America will need to raise additional capital (a positive) and that its underlying business can support a healthy 14% return on equity.
Tangible book value? HAHAHAHAHAHAHAHAHAHAAH. In a bank? What's that? They don't have anything that is actually tangible.
Is this before or after BoA gets a rating downgrade? Which is coming. There's a reason the financial sector is under pressure again.
A) House prices have started declining again
B) Loans continue to default and perform badly, thus all the MBS and CDS that are all still out there, take reserve losses to cover.
C) They are all under ratings review. Haven't you seen the headlines? Banks (and governments) have been put on review for downgrades, that's exactly what exaccerbated the problems last time, increased credit risk and the rates to service debt went up.
In the short term *maybe* the stock market will go back up, but there's a lot more damage being pushed into 2012 and 2013 that is not going to be able to be stopped. The greek default is going to happen. And also, China is going to have a hard landing.
"Deficits Don't Matter"
"There Is No Such Thing As Inflation"
"Deflation Is A Myth"
"Unemployment Is Irrelevant"
"Debt Is Healthy"
"Money Is Over Rated And Belongs To The Rich Only"
"Slave Wages Are Essential For A Healthy Economy"
"Slavery Creates Profits For The Rich"
"Exterminating The Poor Is Necessary"
"Robbing The Middle Class Is Good Common Business Sense"
"Tax Cuts And Welfare For The Rich Creates Prosperity"
"What's Good For Wall Street Is Good For America And It's Shareholders"
"Unions Aren't Necessary, Just Trust Your Just And Benevolent Employer"
"Right To Hire Really Means Right To Fire, But The Majority Of Americans Are Too Stupid To Know The Difference"
"Oligarchies Reign Supreme"
The Elites of America here, wishing you all a great life!
To the Writer of this piece of garbage rubbish column....KEEP DRINKING THE KOOL AID MY MAN. KEEP ON DRINKIN' IT. See how optimistic you'd be as a Middle Class worker like myself who has now been out of work for 15 months. With little or no leads. And set to run out of Unemployment benefits at the end of December. See how optimistic you'd be.......And clearly I am not the only one in this predicament.....I believe I have at least 20 million others in the same boat, by most counts. Ok, some may be 'underemployed'...which of course the BLS counts as 'fully employed'.
So are you suggesting here, I just go out and spend, run up the old credit card???? Is that the solution here? Well, I can tell you, IT's NOT! The only reason we've survived 15 months of this nightmare so far is because we did not get in over our heads with a mega mortgage, fat cat car payments, and carry no credit card debt.
Go ahead, keep suggesting that we are too pessimistic...idiot.
Just one more thing.
If you check the S&P stacked yield (CPI+10 Year + S&P Implied) it currently sits above 7%. A level beyond even that of the 2000 and 2007 peak.
Stock prices are extremely high relative to the actual economic conditions of the globe.
Big business was stimulated, and thus big business is flush with cash and not sure of the future so not hiring.
Small business hires the majority of the workers yet not stimulated (not enough lobby power or unions to satisfy obubu) and not able to borrow because the stimulus was not given with the correct insistences or caveats (to force lending of the money given to be lent out).............so not hiring either!
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