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QE RIP

By Shlomo Maital

QE3

  OK,  the Fed, under Janet Yellin, has officially ended QE3.  After injecting 4 trillions dollars of cash into the US economy,  $85 b. a month for almost four years, it’s over.  It’s time for a summary.  QE (quantitative easing, RIP, rest in peace).

  How well did it work?   Well, it was better than Europe’s austerity, and the EU learned nothing from Ben Bernanke’s aggressive actions to forestall a new Depression.  The U.S. unemployment rate is 5.9%,  GDP growth was 4.6% last quarter, and the dollar strengthened.   Is Europe paying attention?

  For investors?  The 3 QE plans created great uncertainty and volatility. Each time a QE (quantitative easing, meaning, the Fed buys bonds and injects money into the system, that banks can lend) was announced, the stock market rose (expecting some of the new money would go into equities) and each time it ended, the stock market fell. 

   Against expectations the QE 3  has actually lowered the 10 year Treasury bond rate, after it rose by 100 basis points.  This cost bond legend Bill Gross his job at PIMCO, the world’s biggest fixed income investment fund; he guessed wrong on the direction.

   Despite that mountain of money,   inflation remains low, because most of that money is just sitting there, not moving; money velocity has declined.  Deflation is the problem, in the U.S. but mostly in Europe. 

   Overall,  faced with the lack of fiscal policy (as politics forced Obama to slash the US federal budget deficit),  there was no other policy tool available to stimulate the economy, other than QE, boosting the supply of money.  It may yet prove harmful, because the dollar is the world’s currency, still, and there are far too many dollars washing around out there – they are causing property bubbles far away, even in Hong Kong and China.  But for now, it looks like the three QE programs led by Ben Bernanke worked not bad.  

   Let’s watch now how his successor Janet Yellin handles weaning Wall ST. from its junky addiction to cheap money.  

Why U.S. Stock Price Rise IS a Bubble — Beware

By Shlomo  Maital

Bubble

  The Standard & Poor 500, the broad index of Americna stocks, has set new records this summer.  This, despite the flagging U.S. economy, an unpopular President, gridlock in Congress, and mountains of cash held abroad by U.S. multinationals, stubbornly refusing to invest it in their own country.

   Writing in the London Telegraph, Andrew Davis notes:  “US shares are undoubtedly expensive – on some measures such as the Cyclically Adjusted Price-Earnings ratio, which uses a 10-year average of earnings to calculate their current valuation, they have only been more expensive a few times in the past century. “

   What is going on?  Is it a bubble?

   Andrew Davis has a simple answer.  Stock buy-backs.   

“Companies are using their cash, and cheap interest rates, to buy their own stock, in large amounts.  That said, it is clear that one of the forces that has driven the long rise in US equity prices has been the willingness of companies to buy back their own shares. A lot of this buying has been funded by companies taking advantage of extremely low interest rates to issue debt and using the proceeds to buy in their own equity.”

     Personally I would not invest in companies that have nothing better to do (R&D, innovation, HR, infrastructure, facilities, IT) with their cash than curry short-term favor with myopic shareholders by artificially pumping up their own stock price.  When I tell this to CEO’s, they frown, or worse – but they agree, in their heart of hearts.  They simply feel they have no choice but to buckle under shareholder pressure.   

   They DO have a choice.  Present a capital investment program. Invest when other companies are afraid to.  Then, when the recovery finally comes, you will have a major competitive advantage —  and your stock price will rise for the right reasons. 

Paul E. Singer and U.S. Hedge Fund Rules the World (And May Destroy It)

By Shlomo  Maital

           Singer

 If you believe as I do that increasingly, money rules the world, not ethics, policies, governments, or ordinary people,  then this week you got confirming decisive evidence.

  A hedge fund manager named Paul E. Singer, right-wing libertarian and Republican, who runs Elliott Management, a $25 billion hedge fund,  bought up large amounts of Argentine government bonds after Argentina defaulted on its bonds in 2001 (because the IMF wanted to impose stringent conditions on a bailout loan, a huge mistake).    Then he went into U.S. District Court in Manhattan (like a fixed prizefight, he got to choose the venue most convenient and most likely to get a favorable decision) and won a decision from a judge, stating: “unless Argentina pays up the face value of bonds bought by Singer, it cannot legally pay interest on its bonds to its main bondholders”. 

   The result:  Because a $539 million interest payment was not made (it could not be made, because of that District Court Judge, who by the way is ELECTED!), by Argentina,  S&P rating agency declared Argentina in default.  This likely means that the government of Argentina is barred from raising capital in global capital markets.   Argentina’s economy is in recession,   in large part due to the Sterling law suit.  You cannot run any business, or any country, without borrowing money in capital markets.

    Singer has won.  Argentina and its 41 million people lose, and so does the world. Why?  Because investor panic regarding Argentina will impact other nations, like Portugal, and make their borrowing more expensive. 

    Argentina’s President Cristina Fernandez de Kirchner has made many mistakes.  But this time, the villain is not her but Singer.   And America, whose courts allow him to do whatever he wants for personal gain, damn the whole world.

     If we do not get control of our lives and our money  back from capitalists like Singer,  some day Occupy Wall St. will seem like a kindergarten birthday party.  

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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