Look, I’m just a small value investor who spends most of his time investing in beaten down companies trading at a fraction of NCAV and/or book value. I’m concerned w/ old fashioned things like “margin of safety”, “cash flow”, and “earnings”. So I know my concerns and thoughts on macro policy carry exactly zero weight. Heck, that’s why I spend so little time talking about or even thinking about macro events.
That said, I can’t understand why in the world we’re doing QE3 right now, and (more importantly), given the Fed’s rationale for QE, I don’t understand why they’re doing it in the way that they do it.
QE1 and QE2 have, by most measures, been an outstanding success. Stocks are up way more than 100% since March 2009, and they’re up more than 15% YTD. The economy is growing (albeit way slower than anyone would like) and corporate profits and stock prices are at or near all time highs.
So why do we need another jolt of QE? Would the economy truly crash w/o another round? Isn’t trying to overstimulate a sluggish economy in 2001-2002 what ended up causing the current crisis in the first place?
Ignoring that, aren’t we using up a lot of the economy’s “margin of safety” by doing another round of QE?
Personally, if I were in charge of the economy, I would want the country to run w/ a low deficit, a low debt level, and a modestly high level of interest rates. That way, in times of true crisis (depression, war, etc.), I had a lot of levers to pull to get the country back on track.
Instead, the U.S. is running at high debt, high deficit, and artificially low interest rates even though the economy is in “sputter” mode, not crisis mode… what happens if the economy takes a further turn? Where do we go?
And then let’s get honest about why the Fed is doing this round of QE. The Fed is trying to create such a small return in bond and fixed income investments that people are forced to invest in stocks and risk assets. This “forced” investment will send risk asset prices soaring, which will entice entrepreneurs and business leaders to make investments.
Of course, that begs the question: if the stock market up 15% YTD wasn’t enough “risk enticement” for the Fed, what is???
Thus, my suggestion for QE4: just cut out the middle man. If the goal of manipulating markets is to send stock prices higher, than stop manipulating “just” the fixed income market and start buying stocks.
Heck, let’s ditch inflation targets and start setting price targets for the stock market. Look at the pop in stocks from today’s announcement of QE3. Could you imagine the pop in the stock market if the Fed came out w/ a QE4 announcement headlined:
Today, the Federal Reserve announced it would spend unlimited funds with a goal aimed at reaching a target price of 1750 on the S&P by year. From there, the Fed will raise its target S&P 500 price by 1% per month (stripping out the effects of non-core food and energy stock prices, of course).
Wouldn’t that hit all of the Fed’s targets? Higher stock prices? Check. Encourage risk taking? Check. Plus this route would at least allow the Fed to participate in some of those gains- why should Wall Street traders have all of the fun????
Even better, think of all the capital gains generated by this new policy of forcing stock prices higher. Can you say goodbye federal deficit???
Again, I’m no economist. And I’d rather if we licked our wounds, let the economy muddle on for another few years while the nation repaired its balance sheet, and then started growing from there.
But I’m also not a fan of half-baked solutions like the ones that are currently being offered.
And that’s why I say if the Fed wants to go down this road, they need to put the pedal to the metal and go down this road.
That’s the end of my little rant, the first (and possibly only) time I’ll discuss macro on this blog. After all, there are still plenty of special situations that offer attractive return possibilities for value investors…. with or without more QE.
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