BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY

1/29/13

Yours truly has been alarmed for years now about the aggressiveness of the Fed’s monetary easing; in fact, I feel so strongly about it that I made it the subject of my final post at Rant Finance, P/E RATIOS, EASY MONEY, AND OTHER FINAL THOUGHTS FOR MIGHTY INSIGHTS AT RANT FINANCE

which I have reproduced below.  

The Fed’s easy money policy of zero short term interest rates and at least three rounds (but who’s counting?) of quantitative easings (“QE”s) was ostensibly designed to somehow remedy a problem born of too much spending and borrowing by encouraging more spending and borrowing.  In the process, the policy has financially decimated much of our nation’s elderly population who had the temerity to actually save and invest rather than, as the Fed would advise, follow the advice of my warped generation and spend every last penny and then some out of a perverse notion that spending like a fool will somehow make on happy, fulfilled, and intelligent looking.  Not only have the elderly been tossed over the cliff, but easy money also has the potential to do for our currency what the Fed has already done to the elderly. 

The stated primary goal of Ben Bernanke’s war on the elderly and the greenback is to stimulate the economy by making borrowing and spending cheaper.  A secondary, not often stated, but never denied goal of the Fed’s easy money policy is to force up the price of stocks and other risk assets.  The Fed has so far failed to have much luck stimulating the real economy; we are still growing at a mediocre, at best, pace.  But the Fed has done a remarkable job of stimulating the stock market; note the doubling of the market since Obsequious Ben and His Merry Men embarked on their not all that brave crusade against saving.  The relative success of the efforts to stimulate the economy and goose the stock market have led both the cynical (I prefer realistic.) and the not so cynical to suggest that indeed the primary motive behind the Fed’s rapid easing strategy was to save the stock market and Wall Street rather than the economy.

So how has the Fed managed to succeed in propelling the stock market to levels that seem, to some of us, out of line with paltry progress of the real economy?   The most stated, and obvious, means of sparking the market is pushing the elderly (There Ben goes again!) and other risk averse investors out of safe investments like CDs and money market funds and into the stock market.   The guy who is getting zero on his savings, and thus rapidly eating into his nest egg, looks to earn something somewhere, so he goes into dividend paying stocks or longer and/or less creditworthy bonds.   He is more exposed than he would like to, or should, be and will get cold-cocked if (when?) the stock and other riskier markets head back down, but Ben Bernanke and his pals (and future employers) on Wall Street are happy, so who cares?

There is a less obvious way, however, that the Fed’s easy money policy has goosed the stock market.   The policy has directly driven down treasury and mortgage backed securities rates but has also brought down interest rates along the maturity and credit spectrum.   Even high yield, or junk, bond rates have been brought down dramatically since just about all rates key off treasuries and one of the receptacles of yield seeking money is the high yield bond market.   Spreads in the high yield market are tight, though not alarmingly so.   But given the low level of treasury yields, absolute yields on junk bonds are at or near historic lows; the ETF HYG is yielding around 5.3%, while another popular high yield index, the FINRA-BLP Active High Yield U.S. Corporate Bond Index, yields around 5.9%.   These yields stagger yours truly, who made his bones in the high yield market back in the ‘80s when junk yields were routinely twice as high, but I digress.

With the thirst for yield driving down the price of junk financing, it becomes very cheap for private equity firms to finance leveraged buyouts (“LBO”s).   Indeed, as the Wall Street Journal reported last week, LBO activity is picking up and is expected to ramp up further given the seemingly improving economy and the easy and cheap availability of junk financing.  This not only puts a big quantitative, and larger qualitative, bid under the stock market, but it makes a lot of people richer:  private equity guys, investment bankers, bond salesmen, Wall Street lawyers, to name a few.   So, in the eyes of Obsequious Ben and His Merry Men, the mission has been accomplished.   After all, it is not the elderly middle class saver who will be writing the checks when these monetary estimables at the Fed decide it is time to cash in on their years of “public service,” so who cares that this policy of enriching Wall Street has impoverished our senior citizens?

PROMISED EARLIER POST:

P/E RATIOS, EASY MONEY, AND OTHER FINAL THOUGHTS FOR MIGHTY INSIGHTS AT RANT FINANCE

1/28/13

Stock prices, interest rates, and one of my recurring topics at Rant Finance, worldwide monetary laxity, occupy my thoughts as Rant Finance winds down and yours truly moves on to a new blog, Mighty Quinn on Politics and Money.

--Some argue that stock, even after the breathtaking rally of the last several weeks, are cheap, citing the S&P’s price/earnings (“P/E”) ratio of about 14.   Bulls further elaborate on this argument by stating that, while 14 is not a rich multiple even under “normal” circumstances (debatable, according to yours truly),with interest rates still not all that far from historic lows, the market’s multiple should be much higher.

Whether stocks are cheap or rich is beyond me; back when I was young and knew everything, I was in the habit of telling anyone who showed even the list bit of curiosity or interest what I thought about the level and direction of the stock market.   Now that I have been around for a few trips around the block and have seemingly lost a great deal of my former smarts in the process, I am nearly always agnostic on the direction of markets.  (I elaborated on the futility of trying to call markets in one of my first posts on Rant Finance, NOSTRADAMUSES ON PARADE, 5/7/12.)  But even if one thinks stocks are cheap at these levels, the “multiples should be much higher at these levels of interest rates” argument is a poor reason for such bullishness.  

Interest rates are not low due to natural market forces such as the sluggishness of the economy or a consensus regarding the quiescence of inflation; rates are low because the Fed has done everything it can to keep them low and has stated that it will continue to do so for the foreseeable future.   People know that rates are artificially low and that this Potemkin low rate environment cannot last forever.   Thus, the multiple expansion pressure that low interest rates normally exert is, in all likelihood, not a factor in the present rabbit hole monetary environment we are experiencing.

--Speaking of the present rabbit hole monetary environment, one of my recurring themes in my musings on this site has been that world monetary authorities have completely abrogated their responsibilities to maintain the values of the currencies over which they have been given tutelage.  See, for example, my 10/23/12 piece,  ARTIFICIALLY LOW RATES:  FROM MR. BIBLE’S LIPS TO GOD’S EARS and my 9/11/12 piece, A LOOK AT MARIO DRAGHI FROM THE FAR SIDE and the posts to which they will refer you.

The latest incidence of the monetary authorities tossing their inflation responsibilities over the side in order to provide some temporary juice to their domestic economies is the wholesale printing of yen by Bank of Japan (“BOJ”) President Masaaki Shirakawa has been undertaking at the behest of new Prime Minister Shinzo Abe.   (See my 12/19/12 piece, SHINZO ABE TO THE BANK OF JAPAN:  BE MORE AMERICAN!)  Yes, Japan has plenty of problems, only one of which is the constant fear of tipping into full scale deflation.  And, yes, some monetary loosening is needed as part of a comprehensive cure for Japan’s problems, if indeed such a cure is possible.   But German Chancellor Angela Merkel and Bundesbank President Jens Weidmann were right last week when they accused Messrs. Shirakawa and Abe, and Mr. Shirakawa’s colleagues among world monetary authorities, of engaging in a wholesale currency war, heartily joining in a competition to see who could debase his or her currency the most quickly and decisively.   The credibility of Ms. Merkel and Mr. Weidmann would be stronger if they did not allow themselves to be rolled by their colleagues in the eurozone, but that is grist for another mill that has been visited on numerous occasions on Mighty Insights at Rant Finance.  See my 6/29/12 post “PICTURE SHOW, SECOND BALCONY, WAS THE PLACE WE’D MEET, GO DUTCH TREAT, YOU WERE SWEET...” and my 5/3/12 post, DANKE SCHOEN, CHANCELLOR MERKEL. 

If the rest of the world doesn’t become more German on monetary matters, indeed, if the Germans don’t become more German on monetary matters, there is little hope for the future of fiat currencies.   Since most central bankers, and most saliently our own Ben Bernanke, have chosen to abrogate their responsibilities and show no signs of becoming more Teutonic in their approach to their jobs, it is hard not to hold gold, silver, and other alternative stores of value, even at these seemingly inflated prices.