All this talk of quantitative easing reminded me I need to get my pants to the tailor for some ‘quantitative easing’ of my own in preparation for this Thursday’s feast.
For those of you who may not have been paying attention to economic news over the past few weeks, the Federal Reserve has announced its intention to buy $600 billion in longer-term Treasury securities over the next few months in what is being called QE2. The very original name comes from the term quantitative easing, which is what the Fed is doing, and the number two, because this is the second time they have done this since the financial crisis and the ‘Great Recession’ first began. The idea is that the Fed will purchase longer-term securities in an effort to lower longer-term interest rates.
What is, in our opinion, more interesting than what the Fed has done has been the reaction. I cannot recall a time when the Fed has been attacked more than they have been for this announcement. Many of these attacks are based more on politics than economic reality. My personal favorite is the labeling of QE2 as “unprecedented.” (This is why I felt the need to explain where they came up with the number two in the name…see, they have done this before, which means there is a precedent, so it is not, in fact, unprecedented.) The other complaints have come primarily from foreign countries accusing the Fed of trying to devalue the dollar. Of course these arguments have come mainly from Germany and China, two countries whose economies are largely based on exports, and a weaker dollar makes German and Chinese goods more expensive here in the US.
In fairness there are legitimate criticisms, the most accurate of which, we believe, is that it simply will not work. It is more than interesting that the yield on the 10-year Treasury went up after the announcement of the QE2 program; however, by and large I think people are being unfair to Mr. Bernanke. The man has an impossible job. First, he must keep prices stable, and second, he must promote full employment. This is like the party host telling the bartender, “I want you to make sure everyone lets go and has a good time, but don’t let anyone get served too much.” This is the nature of the Fed’s “dual mandate” – under the current system it is the Fed’s job to do what they can to promote job growth, and with the Fed funds rate already at zero, quantitative easing is what they can do to promote job growth.
We believe QE2 won’t work because the lack of job growth has nothing to do with the lack of money. If anything, corporate America is sitting on too much cash. Companies are not spending because of the unusual level of uncertainty in our future, not for a lack of resources. But there is hope and reason to be thankful as we approach our national day of thanks. The proposals coming forth to help alleviate our budget woes are very encouraging. Of course there is always something not to like and pundits will get much more air time for singling those out, but the overall direction of lower tax rates with fewer deductions is a good thing. Just adopting one of the suggestions – lowering the corporate tax rate – will do more for unemployment than all the QE in the world. Who knows what, if anything, actually will come out of our new Congress in terms of deficit reduction and tax policy, but at least they appear to be starting from a reasonable point, and that is a big change from the past few years.
This continues to be a difficult time, but when we sit back and reflect on what really matters, the vast majority of us have much for which to be thankful this season. As is our tradition, here are some things for which I am grateful this year:
• Not being the Chairman of the Federal Reserve.
• A new Congress we can vote out again in two years.
• Positive equity market fundamentals.
• Not being Wake Forest’s new basketball coach (he may not want to unpack his bags).
• Having graduated from a university with an excellent academic reputation to which we can point when our athletic teams let us down.
• My many friends and family members.
• Mama’s pumpkin cheesecake.
• The quantitative easing of my waistband just in time for Mama’s pumpkin cheesecake.
• Being alive for another Thanksgiving.
I am also thankful for you, our clients and friends. Legendary hedge fund manager Seth Klarman was recently quoted as saying that the secret to success for an investment firm is to have good clients. I could not agree more. Thank you for your continued trust in Iron Capital.
Chuck Osborne, CFA