QE: The Greatest Thing Since Sliced Bread*
August 24, 2013 at 11:40 pm 4 comments
Quantitative easing (QE), or the Federal Reserve’s bond buying program, has been a spectacular success. Arguably, the greatest innovation since sliced bread. Don’t believe me? I mean, if you listen to many of the experts, strategists, economists, and blogosphere pundits, the magical elixir of QE can be the only explanation rationalizing the multi-year economic recovery and stock market boom. Don’t believe me? Well, apparently many of the bearish pros make sure to credit QE for all our financial/economic positives. For example…
- QE is the reason the stock market is near all-time record highs.
- QE created seven million jobs in the U.S. over the last four years.
- QE turned around the housing market.
- QE turned around the auto market.
- QE weakened the U.S. dollar, resulting in flourishing exports.
- QE has lowered borrowing rates, thereby cleansing consumer balance sheets through deleveraging.
- QE is the reason Facebook Inc. (FB) hired 1,323 employees over the last year.
- QE is the reason Google Inc. (GOOG) has spent $7.8 billion on R&D over the last year.
- QE explains why McDonald’s Corp. (MCD) plans to open more than 1,400 stores this year.
- QE explains why Warren Buffett and 3G capital paid $28 billion to buy Heinz.
- QE is the reason Elon Musk and Tesla Motors (TSLA) invented the model S electric vehicle.
- QE exhibits why Target Corp. (TGT) is expanding outside the U.S. into Canada.
- QE is the reason why S&P 500 companies are expected to pay $300 billion in dividends this year.
- QE is the reason why S&P 500 companies were buying back shares at a $400 billion clip this year.
- QE is the basis for corporations spending billions on efficiency enhancing cloud-based services.
- QE led to a record number of new FDA drug approvals last year.
- QE has caused a natural gas production boom in numerous shale regions.
Wow…the list goes on and on! Heck, I even hear QE can take the corrosion off of a rusted car battery. Given how incredible this QE stuff is, why even consider tapering QE? Financial markets have been volatile on the heels of tapering the 3rd iteration of quantitative easing (QE3), but why slow QE3, when the FED could add more awesomeness with QE4, QE10, QE 100, and QE 1,000?
All of this QE talk is so wonderful, but unfortunately, according to all the bearish pundits, QE has created an artificial sugar high, thus creating an asset bubble that is going to end in a disastrous cratering of financial markets.
I know it’s entirely possible that QE may have absolutely nothing to do with the financial market recovery (other than a bid under Treasury & mortgage backed security prices), and also has no bearing on why I buy or sell stocks, but I guess I will need to hide in a cave when QE3 tapering begins. Although the end of dividends, share buybacks, housing/auto recoveries, acquisitions, expansion, innovation, etc., caused by QE tapering sure does not sound like a cheery outcome, at least I still have a loaf of sliced bread to make a sandwich.
*DISCLOSURE: For those readers not familiar with my writing style, I have been known to use a healthy dose of sarcasm. Call me if you want a deeper explanation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE II : Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and GOOG, but at the time of publishing, SCM had no direct position in FB, TSLA, MCD, BRKA, TGT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page
Entry filed under: economy, Financial Markets, Themes - Trends. Tags: autos. economy, dividends, Elon Musk, equities, housing, Qe3, share buybacks, stock market, tapering, Warren Buffett.
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Philosiful | August 25, 2013 at 4:54 am
First of all, I don’t know a damn thing about finance. I do have a question about the stock market. “QE is the reason the stock market is near all-time record highs.” (not your opinion, I know). I’ve heard this a few weeks ago on the news. They said the economic crisis was nearly over because look at the stock market! Yet unemployment is still bad and companies are still struggling. Wasn’t the financial crisis (at least partly) the result of a gap between the economy out-there and finance in the stock market, fueled by too complex financial systems/products? So isn’t a rising stock market and a stagnating economical activity and employment an extra problem instead of a sign of recovery?
I’m pretty sure this question is way too generailzing. Oh well..
2.
sidoxia | August 27, 2013 at 4:11 pm
Thanks for the note. The stock market and the economy, as measured by GDP (and or job creation), do not always move in the same direction. In many instances one is moving up while the other is moving down. Generally, however, the stock market will follow corporate profits. As profits collapsed in 2008-09, so did stock prices. When profits began recovering, so did stock prices. What confuses many people is that much of the gains in profits have come through expense reductions, and through efficiencies (i.e., technology) – not through aggressive hiring and expansion. Corporations are also making profits by investing internationally, so just because profits may not be great in the U.S., companies have learned new ways to skin the profit cat…WS
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Philosiful | August 28, 2013 at 12:26 am
So the stock market isn’t really wrong, it simply doesn’t care about a lot of aspects (like employment in eg USA) that I consider part of a “recovery.” Thanks!
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