Thursday, September 13, 2012

What to make of QE3

I'm very annoyed that Bernanke announced QE3 today.  The plan is to purchase $40 Billion of mortgage-backed securities each month until they are satisfied that the economy, specifically unemployment, is righted. He also announced today that interest rates will stay near zero until mid-2015.  The hope is to stabilize and hopefully spur the housing recovery.

The American people haven't been purchasing houses because they either don't have jobs, don't work enough hours or have no idea what the future of their job is.  It's not because mortgage rates are too high, they're at all-time lows.  What I see as the reason for doing this is to further clean up the banks' balance sheets by taking MBS off their books and hopefully spurring further lending by the banks with a pocket full of cash and low interest rates.




The Fed has already pushed on inflation and luckily not had it show up across the economy as a whole.  However, energy and food, especially, has seen high rates of price inflation and this will probably serve to promote more of the same at least.  Last I checked almost every person spends a good chunk of their money on food and energy.

The latest round of QE will prop up the stock market but each round has had diminishing returns compared to the previous.  There's still several issues that can cause panic to the global economy and stock markets, but in the meantime the stock market will likely get a boost in the short-term with the next hurdle being the fiscal cliff at the end of the year.  Each successive round of QE has had diminishing returns compared to the prior and I don't fully expect this to help make much progress on the employment side while it could help to stabilize a struggling housing market.  Unfortunately, it seems to me that the Fed is too late in aiding the housing market since it had already shown signs of stabilizing and even growth.

Just imagine where we might be had the Fed decided to use all the money from their QE/Operation Twist programs and gave it to all 18+ year old adults in the US.  We'd all be sitting on an extra $60,000+ per person.  Now that could have actually made a difference.

What are you looking to buy after the latest announcement from the Fed?

5 comments:

  1. PIP,

    I'm with you 100%.

    Time to take the training wheels off the market and let the banks deal with the books as they are. We are in a free market, aren't we?

    Best wishes.

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    1. We definitely need to let the market do as it will. Nothing they've done yet has had a measurable effect on unemployment, yet they keep just throwing money at it.

      Thanks for stopping by!

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  2. I completely agree. I was rather disappointed by the QE3 news and the resulting stock market rally. It is becoming increasingly difficult to find attractively valued stocks, so my motivation to buy has waned.

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    1. Unfortunately I think it's going to remain hard to find fairly valued let alone undervalued stocks for the short-term. I fully expect the market to continue it's rally but hopefully we can get a few good headline driven pullbacks on news out of Europe or the fiscal cliff. Now is when you need to really have a plan on investing. I think I'll probably be going lighter on cash as opposed to stockpiling it for the sales I was hoping to get if we had no QE3. I guess it's time to DCA and take advantage of compounding albeit at lower rates.

      Thanks for stopping by!

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    2. I'm thinking the best way to still get income as well as lower entry prices is going to be by selling puts. I know not everyone is comfortable doing that but that's probably going to be the route I take. Although it is nice to see the market pullback after the bigger jump this morning.

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