Monday, February 09, 2015

Groundwork for New QE

I still think a new QE is coming. Roughly eighteen months ago, I threw out a dark horse candidate and mentioned the idea of a Fed funded tax cut. The psychopaths in DC are hammering out a new budget that has a lot of whiz bang tax pieces to it. Those will probably go nowhere. The uproar over taxing college 529s has caused the administration to pull it off the table, and I doubt corporate America will let Obama and company tax their offshore cash. Tax revenue will not be coming DC's way. The stagnation we're in has not boosted employment and wages that much. The bubble recovery has inflated assets, yet I do not see asset based taxes in proposals. A new QE can arrive as long as their is a deficit to finance. QE needs the jokers in Washington to create a bigger deficit.

Because of legal limits on the number of Treasuries the FED can buy, they need a bigger deficit to legally buy USTs out there that fill their QE monthly allotment. The money printing forever trick gets dicey, and holders of USTs or important components of the USD system get nervous if they cannot buy stuff, real stuff, with their dollars. This was the crisis of the '70s after the Nixon Gold Shock up to  the Volker rate hike. The groundwork is laid though for a new QE, and one that would help Main Street. The Democrats are trying to help the middle class, at least paying some lip service to it, and the right always loves tax cuts. Say we get boosted spending and some minor tweaks to the tax rates that create a deficit. The FED can announce QE as a means to fund the tax cut. I thought this was coming many months ago because it is in Bernanke's playbook for defeating deflation.

How can it be a safe play now? A lot of things are lining up well for the FED to safely announce this. First of all, the dollar has risen to levels not seen in a decade. This is killing the multinationals that were earning more dollars with their overseas sales.  The USDX is sitting above 90. The Yen and Euro both look to be in a mess. Commodity currencies have taken a beating. Oil has tanked so the all important gallon of gas measure is around $2.00. Gold is around $1250 an ounce, so a jump of 20-25% would have it sitting well below all time highs but still ticking up in that conspiracy theory looking orderly increase. With gas down, the words disinflation, deflation and negative inflation are being throw around and people visibly see the reminder. This will get public approval for that FED tool to fight deflation, "moar QE".

A new QE will goose markets. The markets, and academia-political-financial nexus point Larry Summers, disapprove of Yellen's approach. By now, Americans must be aware that the consumer confidence index oddly corresponds to the financial markets rather than the unemployment rate like decades of old. We didn't change, just the economy's focus. The other big thing a QE solved is how will the Wall Street mavens and banks clean up all their bad shale gas play lending. The Greenspan 2000 bubble cleaned up bad dot-com debt. The Bernanke bubble cleaned up bad housing debt. Some credit expansion is needed to clean this shale gas play sham.

The groundwork is out there and conditions are lining up in a new QE's favor. No way will the left want to see a contraction of the economy going into the 2016 presidential cycle. This can be marketed as a QE for Main Street, but it will still be to the advantage of early credit receivers. Where oh where will those early receivers in the new credit expansion place their fiat? We did tech, housing, social media, education, but where is that next bubble? Is it the last bubble? Hard to call that since many commentators have been calling for the Wile Coyote moment from our banks any day. It's not going to happen though. No one inside this system is going to throw the brakes. We'll need an external actor. Dancing to their tune might involve consequences a lot more close to home, personal and worse than supporting regime overthrows in random Muslim nations.


nikcrit said...

Question: is a 'quantitative easing period' a good time to buy stocks?

Please keep it simple, cuz i'm sort of a layman when gearing into conversations like these.

Mark Minter said...

It depends on what happens with the Capital Gains rate. If part of the Tax Cut moves CG tax rates closer to the tax rate on income gained from interest, then investors lose some of the incentive gained by deferring tax and receiving the supposed compensation due to increase in an asset class from normal inflation.

The tendency during the days of the Bush tax cuts, where Capital Gains was taxed at exactly the same rate as income, was for investors to say "Show me the money now. Cash is fact, profit and value are an opinion." And they bought instruments that gave fixed return on money.

If you check the historical charts you can see stocks take off when the Bush Tax Cuts expired and Capital Gains was a lower tax rate than income on the highest brackets.

If any subsequent tax cut makes CG get closer to income and lowers the tax on income by any significant amount, it then becomes a straight up function of the expected profits of corporations setting the P/E ratio and how that return compares to other fixed instruments.

Inevitably there will be serious repercussions due to the low price of oil on employment in the energy sector. If nothing is done, the loss of 40 or 50 dollars per barrel across the 5 million or so barrels of oil produced from non-conventional drilling will be a serious loss of revenue to that industry. This oil boom was different in that a high percentage of the price of oil was paid to workers as the fracking process required so many more inputs (like water trucked to the site) that yielded a lot of high paying male jobs.

So the question becomes just how "mainstreet" these spending programs can offset these job losses in the near to mid term until the price of oil regains some higher level to warrant further investment and drilling. One of the benefits of Fracking is that well deplete quicker, something like 35% percent per year compared to single digits in conventional wells.

But also at the same time, all products have some energy component in the price of them. Lowered energy leads to lower costs which can then be passed on to consumers. So there is more discretionary spending possible at the hands of main street spenders.

What we saw in 2008-2009 was that these main street things such as the stimulus get chewed up by vested interests long before they reach main street. All that vaunted infrastructure money was stolen by feminists and local or state govs. Look for more of the same.

I know this is a lot of chatter but the things to watch are (a) the diferential between Capital Gains and Profit (2) Expectations of Corporate profits. Assume big institutional investors will run for the cover of fixed rate assets unless profits create P/E ratios that give them ample incentive to fore go a known return to one that is more volatile and more susceptible to risk.

peterike said...

So basically, the (manufactured) decline in oil prices hurts the two main enemies of the moment.

1. Russia
2. White males (the eternal enemy)

Looks like win-win.