QE – To Infinity and Beyond!

The stock market has had a small pullback this week after the ECB and Fed-induced rally over the past several months.  Part of the pullback was due to Charles Plosser, a Federal Reserve President, who made waves this week when he gave a speech criticizing the Fed’s recent QE3 program.

From Marketwatch.com:
One of the leading hawks on the Federal Reserve slammed the central bank’s new asset purchase program on Tuesday, saying that it wasn’t necessary, wouldn’t work and is risky.

In our view Charles Plosser is right, there is nothing that the Fed can do right now to help lower unemployment or grow the economy.  The first quant-easing program in March 2009 was necessary to stabilize the financial system but other programs the Fed has implemented since then have had little impact and have actually led to higher food and gas prices in the eyes of many economists.

Excessive regulations, 2013 tax uncertainty, the election and the fiscal cliff are among the issues holding back growth in the economy and in employment.  As the Fed continues to push on the string that is QE3, the challenges they will face when they try to unwind these programs will become greater and greater.

As much as we did not agree with the Fed’s QE3 decision we did expect them to act and used the prior 4-5 months to take some investment positions that were well positioned for QE3.  We will continue to work hard to spot investment opportunities, while keeping a watchful eye on risk.

More Stimulus Please

It has been an action-packed two weeks with a variety of economic/political events. Let’s get to it.

1)  The European Central Bank announced their latest attempt at solving the Euro debt crisis.  This time the ECB stands ready to buy an unlimited amount of Euro-zone governments’ bonds.  From The Guardian:
The scheme is aimed at depressing the costs of borrowing for Spain and Italy and countering the risks of a fragmentation of the eurozone and the unravelling of the single currency.  But Draghi also set strict terms for triggering the bond-buying programme, putting pressure on the eurozone’s political leaders to request help, enter austerity programmes, and agree on direct bailouts for struggling governments before the ECB will act.

For more on the ECB’s announcement:
http://www.guardian.co.uk/business/2012/sep/06/debt-crisis-mario-draghi?newsfeed=true

The ECB is saying that if a struggling country agrees to cut government spending and agrees to other restrictions, the ECB will buy an unlimited amount of that government’s bonds.  The problem, as we have seen in Greece, is that the governments in Europe have a very hard time implementing the spending cuts and sticking to the restrictions.  If spending cuts and reforms are not implemented then you have a transfer of wealth, via the ECB, from stronger countries like German, Belgium and The Netherlands to weaker countries like Spain, Italy and Greece.

As we have said from the beginning of this crisis, it is challenging to identify a scenario where this does not end badly.

2)  The August jobs report was disappointing with only 96,000 new jobs added and a downward revision to the previous two months.  The Unemployment Rate dropped from 8.3% to 8.1% but this was largely due to discouraged workers dropping out of the labor force.  

For more commentary on the fourth poor jobs report in the last five months:
http://www.nationalreview.com/corner/316233/jobs-report-what-recovery-veronique-de-rugy#

3)  Finally, the Federal Reserve meets this Wednesday and Thursday and may announce further monetary stimulus for the economy.  The Fed has already had two official rounds of bond-buying (QE) and a third round called Operation Twist. There is a spirited debate about whether the Fed will announce a QE3 this Thursday.

Here are both sides of the debate:

Why QE3 won’t be announced this week:
http://pragcap.com/why-qe3-isnt-coming-this-week

On top of all of this we are keeping our eyes on the impact of the election, the looming Fiscal Cliff and Apple’s upcoming product line, as all three events will have an impact on the stock and bond markets.