Quantitative Easing: The New American "High"

by Lear Capital EditorialMay 07, 2013
american flag map cash background

Is there anybody in there?
Just nod if you can hear me
Is there anyone home? (Comfortably Numb – Pink Floyd)

The stock market has now reached a place where no market has gone before and yet very few Americans understand the level of Federal Intervention that has gotten us here. We are being “eased” ladies and gentlemen with waves of “quantitative” cash intended to stimulate spending, lending and investment.

In four Quantitative Easing events since 2008, the Fed has credited its own account to purchase Treasury bonds and bank CD’s to juice Money Markets to record levels. The theory is that a flood of liquidity will encourage lending institutions to give money more freely while also boosting the markets and making us all feel incredibly comfortable and astonishingly numb.

This delusion of prosperity has literally kept the good times rolling and the champagne corks popping on Wall Street where investment bankers are riding high and investors are eagerly embracing a cavalier “eggs in one basket” approach to their retirement and savings accounts.

The Fed knows all too well that markets are driven by cash and confidence and that the rally-hungry populace will slurp up short-term gains with reckless abandon. But they also know that markets are decidedly fickle, extremely tenuous, and easily broken and that fast infusions of liquidity only increase volatility and fragility over time. So when the lack of actual yield and the drop in real returns creates the jitters, they’ll be ready with another feel good injection.                                                                                                              

Like a bridge over troubled water Living is easy with eyes closed
Misunderstanding all you see (Strawberry Fields Forever – The Beatles)

For those in the economic know, the US Recovery has its share of smoke, mirrors, funny spreadsheets and diversionary talking points. For hardened economists; however, it is a fully choreographed, Hollywood-style production with big numbers and little basis in reality. The dramatic jump in the markets, the slight improvement in unemployment levels, and the modest rise in real estate values have all been made possible by massive, orchestrated debt creation. Quantitative Easing, after all, is government sanctioned counterfeiting that ultimately destroys currency values.

But with the standard US investor holding a portfolio of stocks and bonds, things do seem pretty groovy on the surface. After all, the markets have risen over 13% so far this year, hitting their highest levels in history. And, when one looks no further than the Dow Jones green “up” arrow streaming across the bottom of our favorite daily News Channel … stock holders do appear to be sitting pretty.

Alas, successive rounds of stimulus have forged a fundamental disconnect between market performance and fiscal reality. And, growth indicators have been all but been rendered meaningless in the wake of easy money that fuels paper stocks like dry brush in a wild fire.

This is all in spite of higher taxes, slowing job growth, rising fuel costs, weaker retail sales, non-existent wage gains, disappointing payroll reports, and a feeble real estate recovery. Most leading financial indicators are either below par or woefully disappointing. Still, investors seem more than willing to live in the dream space between economic data points and rising stock market points with their eyes firmly closed.

Like a bridge over troubled water
I will ease your mind (Bridge Over Troubled Water – Simon and Garfunkel)

There have been four rounds of Quantitative Easing since the economic crisis of 2008. Each one has been intended to stimulate the economy to get us over the troubled waters of the recession. QE-1 was launched in December of 2008 with the purchase of $600 billion in mortgage backed securities and agency debt. From November 2010 to June 2011, the Fed enacted QE-2 and purchased another $600 billion of long-term treasuries. In September of 2012, the Fed introduced its most aggressive bond-buying measure yet with QE-3, which was an open-ended money drip pumping $40 billion a month into the markets. All of this was in addition to Operation Twist which swapped short-terms bonds for long-term bonds. And then in January of this year, the drip became an infusion as the Feds increased the amount of open-ended, monthly bond purchases from $40 billion to $85 billion in what is now considered QE-4.

While the Feds firmly believe that they have built a sturdy bridge over the punishing torrents of a turbulent economy, the reality is that it’s a bridge to nowhere. To date, the Fed’s portfolio totals nearly $2.9 trillion dollars, having tripled in size since the 2008 crisis. Meanwhile, unemployment is still at 7.6%, the housing recovery is among the slowest in history, consumer credit is extremely hard to come by, the price of goods and commodities has risen, US Debt has climbed $6 Trillion in less than 5 years, and the steadfast US dollar is fighting for its life.

After 5 years of multi-trillion dollar market stimulus and six years of ultra low interest rates … all of our cheap money has little to show for itself. Stocks are clearly rising but it is not due to real economic growth, rather it is a symptom of the Fed’s bloated balance sheets. But don’t tell that to the people on the bridge. They are chilling out just above the rough, dark waters below …teeming with weak dollars, and swimming with the threat of higher interest rates and rising inflation. Unfortunately for them, reality drifts right behind puff the magic dragon and the imaginary pirate ship.

And if you go chasing rabbits
And you know you're going to fall (White Rabbits – Jefferson Airplane)

Nothing invigorates the markets like a soaring Dow. To the average consumer trying to get ahead or at the very least recoup some of their losses from the recession, tax hikes, lower returns, layoffs, furloughs, or the real estate crash … a record-setting stock market is sheer nirvana. After all, the market’s recent upswing has been the only positive news after years of fiscal free falls, downturns and declines.

Embracing a positive return has become a mental health exercise for the many Americans that have begun to wonder if they have forgotten how to win. We need to succeed, and that is precisely the problem. Today’s markets are emotion-driven. They are being fueled by the frustration of going without for so very long, and they are simply not real. Chasing pumped up markets is like chasing rainbows, or rabbits, or the wild goose. It is a punishing, compulsive, and exclusionary exercise for restless consumers.

With a fairy tale recovery set within a fictional economy, massive federal spending has done little to solve our original economic crisis.  As a matter of fact, QE action has increased the risk of inflation and higher interest rates and has postponed a debt dilemma that is getting more insurmountable by the day. Worthless money has proven to be an opiate for empty wallets and as many continue to soothe their souls with the ballooning returns from inflated markets, they remain unprepared for the aftermath.

Anything propelled by the reckless and irresponsible policy of printing money is doomed to crash … and all indications are that the market is poised for a significant correction. Still, many continue to believe and to buy. Entranced by the illusion of surging profits, they wander in the vast, formless rooms of their castles in the sky. While the golden rule of investing tells us to never risk money that we cannot afford to lose, it’s not always easy to overcome the temptation to feed our heads.

This is the end
My only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end (The End – The Doors)

It’s simply not going to end well. The federal government cannot continue to infuse the markets indefinitely. The longer they do, the greater the distortion, the larger the bubbles, and the bigger the bang when they all finally pop. When the fast cash cocktail is clamped off, and the free money high subsides … the markets will exhibit all the jitters and tremors that come with withdrawal.

It was an elaborate plan indeed: the Federal Reserve has pushed interest rates to some of the lowest levels in history and inflated markets to some of the highest levels ever in an effort to stimulate the US economy. But, the ends have not justified the means.

CD’s, treasury bonds and Money Market accounts are all approaching negative yield. Older investors, lifetime savers, and those that need to live on their returns are being squeezed to the point of insolvency … making the bloated markets their only viable option. But, there is no safety and no surprise there either. The government has no clear plan as to how it will unload its multi-trillion dollar portfolio when the time comes. A Federal sell-off could send bonds plunging, investors scrambling, and wipe out the meager assets of those that sought refuge in the Dow.

The government also has no real plan to tackle our national spending problem. QE has been the drug that has kept us alive, but it is also the addiction that is killing us. It may indeed prove to be the end of “everything that stands” because printing money is the very last refuge of desperate governments and distracted societies.

It hurts to set you free
But you'll never follow me
The end of laughter and soft lies
The end of nights we tried to die
This is the end.

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