Saturday, December 20, 2014 07:22pm
North Adams, MA now: 23 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: The End of QE II: Wax On, Wax Off
By: Bill Schmick On: 11:59AM / Friday July 01, 2011
Important
0
Interesting
1
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

"Wax on, right hand. Wax off, left hand. Wax on, wax off. Breathe in through nose, out the mouth. Wax on, wax off. Don't forget to breathe, very important." — Mr. Miyagi, from "The Karate Kid"

Miles of newsprint and thousands of terabytes of Internet space has been devoted to what happens Friday, the day after the end of the Federal Reserve Bank's quantitative easing experiment. Some say it bodes ill for bond and stock prices. Others argue it will have little or no impact. I say it is simply the end of one program and the beginning of another.

The total cost of the Fed's Treasury bond purchase program amounted to $600 billion. The goal of QE II was to put more money in the hands of consumers and corporations (especially small businesses) in an effort to boost spending and hiring. Unfortunately, it did little to jump start the economy in either area.

In a circular exercise similar to Mr. Miyagi's admonition to "wax on, wax off" the Fed purchased the bonds from the banks, hoping that they would in turn lend that sudden windfall of money to us. But instead, these banks just bought back more treasury bonds. The banks simply refused to lend that money and the Fed has no authority to make them.

QE II did result in lowering interest rates to historical lows, however, which allowed financial speculators to borrow money cheaply and to invest that cash (really short-term speculative trading) into commodities, stocks and all sorts of higher yielding securities. Those of us who have retirement savings also benefited somewhat as the stock market rose and we regained some of the losses incurred in 2008-2009.

All it meant for the average Joe was higher gas and food prices as commodities skyrocketed into the world’s latest financial bubble. That actually slowed spending. As for corporations, the big guys already had more cash on their books than they needed. Their profits were exploding as well and none of them felt the urge to hire more labor since they were doing just fine with what they have now. And why not, since their workers have had no wage increases in years, have had their benefits cut to the bone, and if they complained, well, there are always 13.9 million unemployed American who would be happy to take their job at an even lower pay rate ... As for small business, QE II was a total bust for them.

Doomsayers, such as Bill Gross, the highly respected portfolio manager of the world's largest bond house, Pimco, believe that without the Fed’s support, interest rates in the Treasury market will spike, the economy will fall back into recession, and the stock market will tank in response. A host of knowledgeable players subscribe to that theory and have made their views known to anyone who will listen.

Others believe that there are still plenty of potential investors, especially overseas, who will still want to own U.S. Treasury bonds as a safe haven and as a dependable source of income. Interest rates might rise a little, especially on long term bonds (10-20-30 years) but the rise would depend on the growth rate of the economy and inflation expectations. The stock market would no longer be underpinned by the easy money policy of QEII but that might actually be a good thing since it would reduce the amount of speculation that seems to be a massive part of today’s stock markets.

Of course, the caveat here is that Washington politicians come to their senses and do not allow the country to default by refusing to raise the debt ceiling.

In my opinion, I do not think that the Federal Reserve has taken us this far only to cast us adrift to the whims of fate. The Federal Reserve will continue to keep its role as the largest buyer of Treasuries. A week ago, for example, the Fed stated that it intends to use the proceeds of maturing debt that it already owns to buy more treasury bonds as needed. A total of $112.1 billion will mature within the next 12 months. The Fed also holds $914.4 billion of mortgage-backed debt and $118.4 billion of Fannie Mae and Freddie Mac bonds,  which will also mature. That will mean an additonal$10 billion to $16 billion of cash maturing every month. When you add it all up, the Fed has another $300 billion in cash, more than enough to maintain its support of the bond market.

Remember too that the Fed isn't about to give up on the economy just because QE II didn't quite do the job that they intended. Like Daniel in The Karate Kid, the Fed has learned some valuable lessons from their latest experiment.

I predict that they will try again, as early as next month, to come up with yet another way to stimulate the economy. I’m not sure what they have up their sleeves, but I expect we will start hearing rumors about a new plan very shortly. That will certainly play well in the stock market, don’t you think?

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: QE II, economy      
News Headlines
McCann Students Lauded for Leadership & Skill Building
BU Looking For More Use of Tanglewood Campus
Battalion Falls at Danville
Berkshire County Arc Receives Workplace Wellness Grant
Cultural Pittsfield This Week:Dec. 19-Jan. 4
Groundbreaking Ceremony Held at New Williamstown Senior Housing
Shakespeare In the Park Will Resume At Pittsfield Common
Park Street Reconstruction Will Be Completed In Spring
'Exodus: Gods and Kings': And Frogs, Too
Hotel on North Construction Third Complete

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (152)
Independent Investor (208)
Archives:
December 2014 (4)
December 2013 (3)
November 2014 (4)
October 2014 (9)
September 2014 (5)
August 2014 (7)
July 2014 (2)
June 2014 (6)
May 2014 (9)
April 2014 (8)
March 2014 (6)
February 2014 (6)
January 2014 (8)
Tags:
Federal Reserve Debt Ceiling Recession Crisis Europe Metals Euro Greece Markets Congress Stimulus Selloff Energy Fiscal Cliff Jobs Commodities Deficit Japan Rally Pullback Retirement Election Fed Bailout Stock Market Banks Stocks Oil Taxes Currency Housing Debt Europe Interest Rates Economy
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
The Independent Investor: Election Investors Ignored
@theMarket: It's All About Oil
The Independent Investor: Is Russian Bear Back In His Cave?
The Independent Investor: The Truth Behind Black Friday
The Independent Investor: Is There a Doctor in the House?
The Independent Investor: The Pipeline Made Simple
@theMarket: Markets Are in Half Time
The Independent Investor: U.S. and China Square Off
The Independent Investor: Workers Get to Save More in 2015
@theMarket: All Clear


View All
Girls BB: S Hadley vs Hoosac
Friday night girls BB game final - Hoosac 65 South Hadley...
Girls BB: Mount Greylock vs...
Greylock beats Wahconah 52-46
Hotel on North Construction
Media and local officials got a tour of the under...
Hockey: Wahconah vs Taconic
Andrew Beaudoin scored two goals and added an assist to...
Swimming: St. Joe s vs...
Emma Whitney and Jesse Tobin each won two events to lead...
Boys BB: St. Joe vs Drury
The annual Gene Wein Boys Basketball Holiday Tournament got...
Boys BB: Monument Mountain vs...
The annual Gene Wein Boys Basketball Holiday Tournament got...
Girls BB: St. Joe's vs McCann
McCann Tech girl's win over St. Joe's, Monday night at...
Cheshire Church Christmas...
Cheshire residents walked or traveled by hayride to...
Sen. Downing's Holiday Open...
State Sen. Benjamin B. Downing held his annual holiday open...
Crane Winter Wonderland 2014
Santa's Winter Wonderland at the Crane Mansion.
Boys BB: Chicopee Comp vs...
The Drury boys basketball team recorded its first "W" in...
McCann LPN Graduates 2014
McCann Technical School's Licensed Practical Nursing...
MCLA Honors Adams Scholars
MCLA recognized the achievement of high school seniors who...
Wahconah Falls in State Title...
Wahconah never did get those points in a 43-0 loss in the...
Pittsfield March for Justice
More than 200 Pittsfield and county residents marched on...
Girls BB: S Hadley vs Hoosac
Friday night girls BB game final - Hoosac 65 South Hadley...
Girls BB: Mount Greylock vs...
Greylock beats Wahconah 52-46
Hotel on North Construction
Media and local officials got a tour of the under...
Hockey: Wahconah vs Taconic
Andrew Beaudoin scored two goals and added an assist to...
Swimming: St. Joe s vs...
Emma Whitney and Jesse Tobin each won two events to lead...
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved