Real QE3 stimulus is negative

The true nature of the easing efforts is only revealed after taking into account other government activities.

By Stock Traders Daily Dec 26, 2012 10:46AM
Hisham Ibrahim CorbisThe stimulative efforts of the so-called QE3 -- the third round of quantitative easing by the Federal Reserve -- are not what they appear to be. The Federal Open Market Committee is prepared to buy about $85 billion worth of U.S. Treasuries -- iShares Barclays 20+ Year Treasury Bond Fund (TLT) -- and mortgaged backed securities. We all know that. But when the left hand is shuffling the cups one way we need to pay attention to what the right hand is doing or this shell game could get the best of us. In this case, at the same time the FOMC is buying bonds, the U.S. Treasury is selling them -- and when the government sells bonds it actually drains liquidity from the system.

Looking back to QE2, I wrote "Pulling Back the Curtain on the Wizard," which described the true stimulative nature of QE2. That program sought to buy about $100 billion of bonds per month, but after the offsets by the U.S. Treasury (including maturing bonds) the net stimulus was only about $30 billion per month. This is much lower than the face value of the program of $100 billion, but it still worked to induce the wealth effect and stimulate equity markets.

Arguably, that has caused a 'valuation bubble' in our equity markets, but today's discussion is on the real net stimulus of QE3. This time there is more than just one other hand at play in this shell game. Not only does the U.S. Treasury act as a drain on liquidity this time, but fiscal policy is now poised to do the same.

Breakdown of QE3
Without the inclusion of the U.S. Treasury the stimulus would be the face value of the program, $85 billion. But when we include the offsets by the U.S. Treasury, the net stimulus changes to $11.5 billion per month. This reduced stimulus estimate is no surprise because QE3 is lower than QE2 by $15 billion a month anyway. But again, another important factor is at play. Fiscal policy will now also drain money from the system, and although no one knows what that will look like yet we can deduce a best case scenario now.

Assuming a best-case scenario of a $200 billion headwind this year, which would have been negotiated down from about $600 billion as we know, the monthly headwind of fiscal policy would be about $16.66 billion. This further offsets the $11.5 billion that came after the U.S. Treasury was included in the equation and changes the net real stimulus of QE3 to a negative number. The true net stimulus of QE3 is -5.1 billion per month with a best-case scenario in mind.

The table below offers tangible estimates and comparisons:

 

Monthly Stimulus

QE2

QE3

Face Value

$100B

$85B

After US Treasury

$30B

$11.5B

After Fiscal Headwinds

$30B

-5.1B

Net Stimulus

$30B

-5.1B

 

For details and more information please visit Stock Traders Daily.

Tags: TLT
3Comments
Dec 26, 2012 11:45AM
avatar
I never received any QE1, QE2 or QE3. The Government owes me big money. Hand it over!
Dec 26, 2012 12:46PM
Dec 26, 2012 12:45PM
avatar
Very interesting reading...Providing all Ducks are on the Pond and most are swimmin"G" in a row.?
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120
120 rated 1
268
268 rated 2
439
439 rated 3
709
709 rated 4
641
641 rated 5
609
609 rated 6
640
640 rated 7
516
516 rated 8
272
272 rated 9
152
152 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION10
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.