Saturday, September 21, 2013

Time To End QE

It is time to end QE. Those of us who are very skeptical of the state of the economy saw more proof that we are only held together through props from the Central Bank and government deficits when the Fed failed to start tapering this week. Stocks leaped to new highs on statements from Ben Bernanke that the Fed would delay cutting back on bond purchases until the economy was stronger.  Even recalculating the way the GDP is figured and other tricks have not been able to produce numbers to support positive views. Many see the market jump as a positive, I contend it is the result of massive short covering with bears again running away as stops above the market were hit.

This move doesn't change the economy. In all reality a 10 billion dollar cut in Fed bond purchases each month should not make an overwhelming difference in a 16.7 trillion dollar economy. What is important is the signal it sends. Not being able to cut back QE should send a shiver of fear throughout the investment community. The negatives of continuing QE far outweigh the positives, if anything this only confirms that the economy has serious problems, is too weak to stand on its own, and that something is very wrong. A drastic change has occurred in our economy as it evolved over the last several decades and we must determine how to fix the problems and adjust accordingly. 

For example, and here is where it all gets slightly surreal. The mere expectation that the Fed would start to create less money and thus buy fewer bonds had caused the yields on them to rise. The yield on these bonds are one of the most influential and important interest rates in the US economy, they determine many other interest rates in the US and the rest of the world. Recently we have seen an increase of a full percentage point in arguably the world's most important interest rate that of the US Treasury's 10-year bond. The ramifications have been felt across the world, as international investors reacted by pulling a ton of money out of the worlds riskier economies such as India.

Much of what we see on the economic landscape is a mirage caused by massive amounts of money flowing back and forth across the borders of countries. Now reality has raised its ugly head and it is becoming apparent that our consumer debt driven economy is unsustainable. The entitlements and promises that have piled up have begun to overwhelm those forced to honor them. All of us who own businesses would be adding workers if our phone was ringing off the hook or demand existed for our products, but that situation does not exist. Like everyone else in my industry I'm sitting on empty office space and buildings, cutting cost, and waiting for demand to increase.

It is heart breaking to see the toll time takes on a empty building. Constructing more new buildings while paying the staggering cost of taxes, insurance, and maintaining a huge supply of empty space makes no sense except to those in government that are not using their own money. At this time new construction is not where new and sustainable jobs will be created, nor will they be created by the government running a higher deficit to expand its role in the economy. Government must lift it's foot off the throat of small business that creates jobs and trains workers on the most basic level. Policies that favor the large box stores and companies like Amazon hurt Main Street.

Following the crisis of 2008 the Federal Reserve Bank poured liquidity into the economic system and lowered interest rates. More liquidity is only helpful up to a certain point then begins to distort markets, the same is true of lower interest rates. As lower interest rates become the new normal they tend to lose their ability to push us forward, we are at the place where the cost they place on "savers" far outweighs their benefits.  So the question is, what happens after QE can no longer increase demand and after most or all of this money has flowed into the investment "of the day," what happens when it begins to flow out? The problem is this recovery is being constructed on an unstable base. QE is not the answer and this will not end well or soon.

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