Did you hear that? That was Ben Bernanke trading in his helicopter for a rocket ship. In his recent testimony, Buzz told Congress that the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling:
“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.”
Given that QE3 was off the table just a few weeks ago and is now mentioned as a possibility, implies that it’s coming. Imagine that…and people have been practically laughing at me for predicting over six months ago that another round of stimulus was going to be needed. Taking the deficit to infinity and beyond!
Whether QE3 is the correct way to go is not going to be discussed here. The simple fact is that the market loves it. It is particularly a boon for commodities, as this appears to be the central bank’s main tool in combating deflation, by creating commodity (food and gas) inflation. We don’t have any “real” inflation that comes from asset growth (real estate) or wage growth, so they’re doing the only thing they can. Although, this will look and feel good in the short term, it will ultimately fail in the long term.
The problem is that growth must be stronger to significantly lower the unemployment rate, so they are going to try anything and everything, even if they don’t have a clue on whether it will work or not. The economy would need to grow at a 5 percent pace for a whole year to significantly bring down the unemployment rate. Economic growth of just 2-3 percent a year will simply keep up with population growth and hold the rate steady.
We must all be very aware of where we are in the economy. The advent of a QE3 will have less of an affect than the others, due to the laws of diminishing returns.The last $800 billion package supposedly created or saved 3 million jobs. That works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide. On the other hand, in the very short term,it will give an instant and immediate boost to the GDP, which will make it look like new found prosperity and good government policy.
However, the massive borrowing needed to fund the stimulus programs only increases the deficit and cannot and will not substitute for the private sector investments that are necessary to drive our nation’s long-term growth. More debt means higher future tax burdens, draining future private sector investments, and decreasing returns on investments. This reduces current and future private sector investments, which directly impacts future growth. The aging population of not only the U.S. but in Europe (Greece, Italy, Ireland…coincidence huh?), on top of the massively over indebted populace, is the “Goliath” in my book, Facing Goliath – How to Triumph in the Dangerous Market Ahead, which we cannot outrun. There is going to be hell to pay, and investors had better be prepared.
For the immediate future, earnings are all the rage. If they are good, as I believe they will be, stocks will fare well. I discussed this on CNBC on Tuesday. Without another full scale quantitative easing program, this is likely the peak in this cycle’s earnings phase, and investors have to prepare accordingly. Thus, we will continue to concentrate on our Tactical investment approach and focus on good quality tax-free bonds, high yielding stocks and corporate bonds, where we are still finding yields of over 8-10%. Investing should not be an all or none game, so why take all the risk of the stock market if you don’t need to? Invest for need, not for greed.