The Last Three Days
Nov 7, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Later this month, a new movie is due called “The Next Three Days”. However, I think an apt description on Wall Street recently could be called “The Last Three Days”. On Wednesday, it became apparent that the Republicans were in control of the House of Representatives. That morning, a severely chastised President Obama gave a a very conciliatory press conference. From his body language alone, it was obvious that he was crushed. However, this was just a prelude to later in the day, when the Fed announced the most awaited “QE2″, where they decided to pump an additional $600 billion into the economy by purchasing long term bonds. Where is this money coming from? Well, they are basically printing it! The Fed is hoping, with the help of political oversight, that this money actually goes into the economy. The last time this happened, the banks (who were in horrible shape) simply took virtually all of it and reinvested it in treasury bills. This was intimated to by an Op-Ed in the Washington Post by Fed Chief Ben Bernanke.
Imagine you are a financial institution, and the US government is prepared to give you billions of dollars in loans at a zero interest rate. Then further imagine that these banks could purchase treasuries for a higher interest rate than they were borrowing for (which isn’t tough considering their cost was zero). Essentially, the banks were making free money by lending the money back to the government. Sounds like a great deal for the banks, doesn’t it? Unfortunately, the only losers were the government, which means you and me. This time, they are trying to have sufficient oversight such that the money is actually lent out to the private sector, which will lead to economic growth and more jobs, That’s the plan anyway. However, they tried this in Japan and didn’t work. Besides, as Stanford University economist John Taylor has pointed out, “the impact of quantitative easing on mortgage rates or other long-term borrowing rates has been quite small and statistically insignificant.”
Meanwhile, the stock market rocketed up as it did in the last bailout. As long as the money id flowing, the stocks keep rising. The problem, though, is this: What if it doesn’t work? How exactly do you get all this money back under control before it becomes truly inflationary? I don’t think anyone is certain about this. On Friday, the unemployment numbers were better than expected, and so the climb continued. The Dow rose over 300 points for the week. The NASDAQ has been ever more impressive. In fact, since September 7, The NASDAQ index has gone from 2208 to 2579. During this time period, it has only had 6 down days. In the 13 trading days, it has only been down once.
It is currently hard to find anyone who is NOT bullish today. To me, that in itself could be cause for caution going forward
