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It’s The Jobs That Matters Sir!

Published on November 8, 2010

It’s The Jobs That Matters Sir!

November 8, 2010

What a blitz it was! A $600billion blitz, known as QE2, via buying long term treasuries. Will this help, I don’t know. Did the last QE help? it depends on what success measures you choose. When I look at all the blitz, spending and blah blah, one thing strikes me loud and clear (and I am sure to millions others as well). It’s the jobs that matters Uncle Ben. Jobs, Jobs, Jobs!

Let’s look at the last week’s op-ed by Uncle Ben in The Washington Post titled “What the Fed did and why: supporting the recovery and sustaining price stability”.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

Buy in anticipation and sell on news! I personally have traded based on that “saying” many times in the past. I don’t think markets rallied because of QE2 but due to the clarification that was provided via this op-ed and it seems, at  least to me,  that the agenda is to drive stock prices higher. What happens after the QE2 announcement to both Yield and markets, let’s revisit after couple of weeks.

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.

What is the issue? Rate or affordability? If affordability is the issue then is it the rates or the real income of common man that is the issue? If Fed is keeping the rates artificially low, then what happens when rates rises and those who can’t afford to make payments starts to fault, isn’t Fed creating trouble for them and for rest again? The jury is still out whether or not long terms rates will really be dramatically lower; let’s visit that after couple of months. For businesses, is it really the bond rates that’s hampering the business investment or is it lack of investment opportunities due to lack of aggregate demand? Based on a consistent almost 10% unemployment plus fat earnings from corporates, it seems businesses are able to squeeze more from almost same number of people without adding more. Goldman issued a 50year bond and that too callable anytime after 5 years!! As Evan rightly askedDo you believe that Goldman would be selling these bonds a week before the Fed meets if it thought interest rates were heading much lower??” Talk about corporate bond offering!!

Uncle Ben continues his column by saying-

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

This is even more interesting. Since when people have started to adust their consumption based on stock market income or if I may say “temporary income”. It may be true for some but I doubt if this is applicable for majority. People upped the “leverage” and hence “spending” because they thought there is wealth accumulation via “ever increasing home prices”. This is even more so relevant as we have just observed an arguably lost decade of American stock markets when investors have suffered 2 massive sell-offs of 50% or greater decline. And who lost the biggest share of wealth, who felt the most pain? I doubt if it was “too-big-to-fail” institutions. The average Joe is having hard time to find a job; forget about creating wealth while the big fat checks are being written to the Wall Street. I looked elsewhere to find support for my hypothesis. Here is an interesting co-relation of S&P500’s rally with US GDP from John Hussman of hussman funds-

Historically, a 1% increase in the S&P 500 has been associated with a corresponding change in GDP of 0.042% in the same year, 0.035% the next year, and has negative correlations with GDP growth thereafter (sufficient to eliminate any effect on the long-run level of GDP). Now, even if one assumes – counter to reasonable analysis – that the GDP changes are caused by the stock market changes (rather than stocks responding to the economy), the potential benefit to the economy of even a 10% market advance would be to increment GDP growth by less than half of one percent for a two year period.

Now, as of last week, the total capitalization of the U.S. stock market was at about the same as the level as nominal GDP ($14.7 trillion). So a market advance of say, 10% – again, even assuming that stock prices cause GDP – would result in $1.47 trillion of market value, and a cumulative but temporary increment to GDP that works out to $11.3 billion dollars divided over two years. Moreover, even if profits as a share of GDP were to hold at a record high of 8%, and these profits were entirely deliverable to shareholders, the resulting one-time benefit to corporate shareholders would amount to a lump sum of $904 million dollars. In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion. Virtuous circle indeed.

I can’t say much about others, but I would tend to adjust my “permanent consumption” spending only after a “permanent adjustment” to either my wealth and/or income streams. It’s a simple “cash-flow” game. If I start to adjust/fluctuate my permanent consumptions basing on stock markets’ movement, I might be setting-up myself big disappointments. I won’t go into what this excess liquidity is going to to do the International Trade/ currency wars/ Asset price inflation. Let G-20 and China ask those questions to uncle Ben.

All said and done, as the saying goes, “Don’t fight the Tape” and “Don’t fight the Fed” because “markets can remain irrational longer than you can remain solvent”. Interesting dynamics are evolving, safeguard your investments and focus more on “cash flow” (hopefully via Option Trading). Ride the buzz but make sure you know what you are doing NOT what you are reading or hearing. You and I are not “Too-big-to-fail”.

Some questions for you to think about and share your thoughts-

  1. Will you adjust your spending based on stock market prices?
  2. Have you really seen mortgage rates as a bottleneck for your next house purchase/refinance?
  3. If you are part of any corporate investment decision making team, is lack of capital the issue for you?

Pls share your thoughts via posting comments.

Trade carefully, Trade profitably, OP

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