QE-3

[MichaelB]

One potential side-effect of this on employment: It could actually make the unemployment situation worse as some retirees who hoped they could "tread water" with terrible rates on savings for a little while may have to throw in the towel and look for a j*b until they get more than 1% on savings and CDs again.

The data I've seen this year shows men >55 have the biggest growth in labor force participation.

Edit to add: new housing construction is still far below its long term average and probably the most important single driver of current unemployment. Until an additional 750k new houses are being built the economy is likely to continue to drudge along.

 

[teejayevans]

So, how do we take advantage of the QE3? Refinance mortages or other consumer loans? Like someone mentioned, can mortgage rates go down further?

Borrow money cheap and invest?

So instead of getting a mortgage at 4.5%, you will be able to get one at 4.3%, like that is going to make a difference, do they really think people are staying on the sidelines waiting for lower interest rates?? It's just a waste of money. I think they should raise rates, slowly, that would spur people to buy houses, maybe get that business loan, now. But knowing we'll just still be at same interest rates is only going to cause more people to stand on the sidelines.
TJ

 

[teejayevans]

I just noticed this today. The one stock I have that is not an index fund is FCX (a copper and gold mining company). I bought it earlier this year at around $32 and today it is $43. Can you say "Thanks Ben!"

Now if you sell it and spend it on some USA goods or services, Ben's plan will work...
TJ

 

[ziggy29]

I think they should raise rates, slowly, that would spur people to buy houses...

Well, because most people buy homes according to the monthly payment they can afford, if rates rise, the amount of home they can buy will fall in order to maintain the same monthly payment. That could potentially send housing into another tumble, and that's a big part of what QE[1-3] have been trying to prevent, for better *and* for worse.

Though I would grant that a rise in rates could lead to a short burst of increased home buying and refinancing to "get in" before rates get a lot higher... I suspect the longer term would see any such strength gradually eroded.

In any event, Bernanke has effectively taken all urgency out of a home purchase or refinance, and all the hope out of savers and retirees hoping to stay retired with interest income.

 

[explanade]

Hasn't the Fed indicated that it wouldn't be taking these kinds of measures if fiscal policy was more proactive?

Every monthly jobs report this year has shown private sector job gains offset by public sector job losses. The country is operating under an austerity program, kind of like the UK (and like Greece, which had it imposed on them).

 

[MichaelB]

This chart from the St Louis Fed shows the impact of lower interest rates on US households Graph: Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed

I can't reproduce it here because I can't figure out how to do that from the iPad, but the chart shows total debt servicing is back to levels of the late 80's and early 90's.

This allows for deleveraging while minimizing the negative impact on aggregate demand, and is one of the things keeping the US out of another recession.


Edit to add: Josh Brown's colorful view on QE3

Stop reading "Nine Takeaways from the Fed's blah blah blah" articles, they are a waste of time.

There is only one takeaway: The Fed wants you to feel rich.

The game plan is the mother of all Wealth Effect Hail Mary passes and you're in the end zone receiving along with the rest of us.* And this time, they're not playing games.* That's the only real takeaway you need.

Get Rich or Die Trying | The Reformed Broker

 

[Hamlet]

I haven't seen anyone mention perhaps the most important positive affect any inflation generated by this new QE--

It will speed up the de-leveraging process we are going through. Private debt to GDP peaked at about 100% at the start of the crisis. We are down to about 85% now. Consumers spent the last 20 years levering up. Inflation could make the de-leveraging a little quicker.

Our biggest problem is a lack of demand, and one of the biggest reasons for a lack of demand is that many consumers are still up to their ears in debt. Anything that can shrink that debt somewhat will have a positive affect on demand eventually.

Note that the higher oil prices have started a little energy boom in this country. That could help employment going forward.

Remember, those high food and gas prices are also someone's income. Note that gas prices are just now getting back to where they were before the crisis started, so it isn't like we're facing run-away inflation.

 

[CCdaCE]

The takeaway worked for me. I bought a new house.

Now, the question is whether to:

1. Pay off the mortage early (*stir the pot*) .
2. Save cash (and see inflation eat it?).
3. Invest more (but doesn't this overvalued market have to come to a screechin' halt some time?).

/end navel gazing.

-CC

 

[ziggy29]

Now, the question is whether to:

1. Pay off the mortage early (*stir the pot*) .
2. Save cash (and see inflation eat it?).
3. Invest more (but doesn't this overvalued market have to come to a screechin' halt some time?).

Pick your poison. There's simply no attractive place to put money today. Some of them may seem "less bad" than others (dividend stocks?), but none of them seem compelling given interest rates and current valuation of securities.

 

[explanade]

I thought the P/E overall was under 15 and was still historically low?

 

[ziggy29]

I thought the P/E overall was under 15 and was still historically low?

I look at this skeptically, though. A P/E of 15 didn't seem all that high in an environment where the economy was being propped up by heavy and steadily increasing personal, corporate and government debt loads that enabled high GDP and earnings growth. But when that train leaves the station, can there be enough earnings growth to justify that as a "reasonable" multiple? I'm not sure.

One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.

 

[Gone4Good]

One potential side-effect of this on employment: It could actually make the unemployment situation worse as some retirees who hoped they could "tread water" with terrible rates on savings for a little while may have to throw in the towel and look for a j*b until they get more than 1% on savings and CDs again.

Of course if they have any money in stocks . . .

 

[Hamlet]

That 10% earnings growth we used to expect was in an environment of 4-5% inflation though.

In an environment of 2% inflation, earnings growth doesn't need to be as high to justify a P/E.

Even without any growth, a P/E of 15 is an earnings yield of over 6.5%. I'll take that over sitting on cash.

I look at this skeptically, though. A P/E of 15 didn't seem all that high in an environment where the economy was being propped up by heavy and steadily increasing personal, corporate and government debt loads that enabled high GDP and earnings growth. But when that train leaves the station, can there be enough earnings growth to justify that as a "reasonable" multiple? I'm not sure.

One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.

 

[FUEGO]

One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.

PE of 15 equals an earnings yield of 6.7%. If earnings stayed the same in real terms (ie increased at the rate of inflation) then I say the investments yield 6.7% long term (either capital appreciation by reinvesting earnings into the business to grow earnings even more or dividend payouts).

Pretty hefty risk premium vs bonds paying between zero to a few percent. And that is based on zero real growth in earnings forever.

 

[explanade]

Are corporations in debt? I thought they had record cash balances.

 

[ziggy29]

Are corporations in debt? I thought they had record cash balances.

It's very industry-dependent. Manufacturing companies are capital intensive and are likely to have debt on the books. Technology companies, in contrast, tend to have very little debt in relation.

 

[explanade]

I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.

But with real low interest rates, it might not be a bad idea to borrow, issued more bonds.

 

[HawkeyeNFO]

An interesting interview with Ray Dalio, a successful hedge fund manager CEO Speaker Series: A Conversation with Ray Dalio - Council on Foreign Relations

The developed world has too much debt. The Central Bankers are not trying to fix that, just lessen the pain and avoid a repeat of '30. We have a long, difficult trudge ahead.

I find it ironic that you are using a CFR website to highlight your point that the developed world has too much debt.

The CFR was established by bankers, to help ensure that the developed world remains in debt.

 

[Gone4Good]

Hasn't the Fed indicated that it wouldn't be taking these kinds of measures if fiscal policy was more proactive?

The Fed has been asking for a long time now for some fiscal help. So I think the answer to your question is probably "yes."

I think most economists agree that fiscal policy is ineffective when the Fed has the willingness and ability to offset it (e.g. deficit spending isn't expansionary if the Fed is tightening to keep inflation in check.)

Now, with the Fed hard up against the zero bound there is general agreement (although not complete) that Fiscal policy would be effective because not only won't the Fed act to undo it, but is limited in its ability to add more or less stimulus. In that environment, any fiscal action that helps or hurts is not buffered by counterveiling monetary policy.

To this point, Bernanke said in his press conference that he doesn't think his remaining tools are strong enough to prevent a recession if we go over the "fiscal cliff" - which is really just the opposite of a fiscal "stimulus."

 

[FUEGO]

just to throw a little good news in the thread - If the dollar weakens, it should help out by making our exports cheaper and more competitive globally. That means domestic consumption and demand doesn't have to be the driver of our recovery if folks overseas are buying up our goods and services due to low prices (denominated in their overseas currencies of course). Although historically domestic demand has been a HUGE component of economic growth in the US.

As someone else pointed out, housing starts still seem to be in the dumps, although it is a varied market nationally. At some point we will need to build more new dwelling units to replace aging and obsolete units and to accommodate net immigration and population growth due to births and kids becoming adults, and adult kids moving out of mom and dad's house (once they get jobs!).

 

[brewer12345]

I thought the P/E overall was under 15 and was still historically low?

Cue the entrance of h0cu5...

 

[FinanceDude]

I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.

But with real low interest rates, it might not be a bad idea to borrow, issued more bonds.

Why would they add jobs or start any large capital intensive investment in the US? Between the EPA and the govt regs, there's no incentive for them. Apple has about $100 billion or so in CASH........

 

[MichaelB]

Lots of cash is most often a reflection of inadequate demand and usually lots of that cash is overseas.

 

[CCdaCE]

Cue the entrance of h0cu5...

Figured he was still rakin' cash from a book deal or speaking engagements.



-CC

 

[ziggy29]

I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.

Sure -- when you have a terrible economy you can use fear of the unemployment line as a "motivator" to make your workers work more hours with frozen pay -- the work increases, but the number of people to do the work falls. All while pay is flat or falling. Ain't life grand?

And manufacturing jobs (which we are losing) scale almost linearly between sales and jobs. Building software or selling zeroes and ones does not. If you're an automaker, if you sell 10x as many cars you need *almost* 10x as many employees. If I'm selling a piece of software, especially an electronic download, how many more employees to I need to sell 10x as many copies? MAYBE a few more, but probably not even twice as many -- let alone 10x as many.