Thursday, May 29, 2014

Q.E., The Fed, & How YOU were screwed!

Central bank money printing, also known as, “quantitative easing,” was a measure taken by the Fed (Federal Reserve) to accomplish one thing during our 2009 economic downturn: stimulate the economy.  Pumping more cash into our economy, liquidity, and buying U.S. Treasury bonds, had several effects.  One, interest rates for borrowing purposes crept to ridiculously low values.  Banks could borrow low and earn profits lending this “easy” money at higher interest rates to institutions or individuals.  In theory, low interest rates would also allow individuals to dive into the real estate market.  However, this was curbed by the fact that lending standards had changed, and as much as people wanted to take advantage of getting a low mortgage interest rate, they couldn’t.  Tighter bank regulation meant the average person or couple needed to actually show income and have a down payment to qualify for a home loan!

Two, by money printing, the Fed purposely debased our currency, the dollar.  The case for debasing the dollar is to attract more investors abroad to our shores and into our markets.  If their currency is more valuable than our own, then they get more bang for their peso, euro, etc., buying our American assets.  This obviously includes the stocks of our beloved U.S. companies.  It’s simple economics.  When there is more demand and the supply doesn’t change, prices go up.  People don’t think of stocks this way, but they need to.  What drives a stock price up, at its most fundamental level, is the demand that buyers produce day in and day out.  The desire investors have to get shares of a company causes them to “bid-up” the price of the stock.

If you were in the market the past two years, you should be very happy right about now.  Unfortunately, many educators don’t own any stocks.  It kills me!  Maybe they don’t trust the market or they think it’s rigged.  Maybe they think they don’t have enough money to invest.  Or they’re afraid of the risk.  Whatever the reason, not participating in the stock market is actually riskier to their retirement planning than doing so.  Seek understanding, not fear!

Third and last, as mentioned above, interest rates were driven low, so low that it made absolutely no sense to buy generally safer investments like CD’s and bonds.  The 10-year Treasury note was below 2.1 percent at one time.  Would you like such a paltry return on your money?  Heck no!  Not when the other guy is getting 7-10 percent or more with stocks.  The game of investing is not about parking your money and forgetting about it.  It’s about consistently looking for better returns.  Bond investors (their numbers are in the millions) had no choice but to move their money into stocks.  Again, more demand for stocks with no change in the supply, equals a bull run!  Yes, companies issue new shares sometimes and increase the supply on hand.  But because increasing the “shares outstanding” punishes the stock, diluting shareholder equity, companies avoid doing this.


People who had left the market, seeing an accommodative Fed policy, had to get back in; this despite many of them swearing they wouldn’t invest in stocks ever again after getting burned in 2008-09.  In sum, the stock market more than made up its previous losses.  If you had participated, you’d have padded your retirement.  The Fed punished you if you were a saver.

All this Fed policy stuff isn’t meant to bore you.  It’s meant to get you to understand that you need to pay attention to what our Federal Reserve is doing.  Don’t get an F in Fed Policy 101.  Where are we now?  The Fed has reversed its course.  The new Fed chief, Janet Yellen, has continued with the “tapering” started by her predecessor.  Interest rates are slowly creeping up, and the dollar is surging.  This, along with a five-year-old bull-run, is bad news for stocks.  A >10% correction will happen.  Will it be in 2014?  Maybe, maybe not.  But it’s a comin’!

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