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How will they will prop up stocks after QE? An answer?
Bernanke has told us at least a half-dozen times that the primary
objective of QE is to jack up stock prices. Let’s give the man his due.
It has worked. Rising equities and an improving economy are now
synonymous. Daily doses of QE through POMO purchases are creating
liquidity. Some of that loose money finds its way to equities.
The problem with QE is that some of that money is also going to unwanted
places. And it is a factor in rising inflation around the world. While
it is correct to say that the Fed can’t be blamed for everything, it is
also correct to say that ZIRP and QE are adding to the problem.
For that reason alone (there are many other good reasons) QE will end
this summer. When the connection between the Fed’s easy money and rising
global food prices is made in the NY Times (it will be) QE will die.
If that should be the case one would have to expect that a drop in
demand for equities (and other things) is going to have to occur at some
point this year. It could be as early away as four months (the last
month of QE will be of no significance). This creates a problem for
policy makers. They can’t let stocks find their own level. After all, it
is now proven that we need stocks going up for the economy to expand,
it must work the other way round. Right?
I think that there is a solution to this problem. Give the S&P 100 a bunch of money and an excuse to do share buybacks.
Something like that just might happen. It is a development that is most
certainly worth watching for if you have an eye on the tape.
This headline tells the story:
The NY Times had a story on this last year:
If you have a day with nothing to do read this (61 page) report titled:
The conclusion of the report regarding the 2004 tax holiday for US corporations:
Estimates indicate that a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders.
The pieces are on the table. The US desperately needs its
corporations to make major investments domestically if there is to be
any hope on the jobs front. So a deal will be made to bring home the
$1trillion that is currently being parked offshore avoiding taxes in the
US. The deal will be that this money gets hit with little or no tax.
The condition will be (exactly as in 2004) that the money will be
invested in domestic R&D. Everyone will hail this as a step in the
right direction.
But the reality will be that 60-90% of the money gets leaked back to
shareholders in the form of special dividends or share buy backs. The principal motivation for the tax holiday will be to give stocks another lift.
Who knows, this might work. An extra $500b or so coming into the market
should keep the froth going for a bit longer. Right? But after the
buybacks we still will not have much in the form of new investment.
When might this happen? How long might it benefit the markets?
Tough questions. Should our policy makers go this route they are smart
enough to time the results. The tax holiday would kick in during the 3rd
Q (timed to offset the end of QE2). The benefits (if any) would peak in
the summer/fall of 2012. Just in time to influence a big election. Of
course under this plan there would be nothing to prop up the market (aka
“the economy) on the day after the election.
A friend attended an ISI/Ed Hyman meeting. He shared his notes with me. The following caught my eye. Obama is only concerned with the economy in the summer of 2012. Bernanke is concerned with July of 2011 (end of QE). If there were a tax holiday that was “market friendly” timed for the third quarter it would address both of their concerns. A tax deal would let Ben off the hook.
There is one additional piece to this puzzle. Who is advising the President on these matters? Our boy Jeff Immelt, CEO of GE. The fox is truly in the hen house this time.
More on this topic at Zero Hedge.
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You actually expected something else? Haven't we seen this movie before?
If one makes the assumption that the net result of the QE's to date has been money into the stock market and onto bank balance sheets in an effort to address the losses that will have to recognized from toxic assets and the foreclosure backlog that is coming and debt is monetized through Fed POMO activity, must the same result come from a tax holiday for repatriating offshore dollars? Might it be possible that a significant part of that money could actually go into capital investment in an attempt to actually do something to stimulate the economy instead of protect the TBTF's? To date the money created has not increased the money supply which has held inflation in check (as the PTB see it). If the repatriated money actually does get spent on something other than bankers it seems likely that it would increase the money supply that is in circulation. So actually doing something to get the economy going might have the unintended effect of letting the inflation genie out of the bottle.
Where is the offshore money now? I would assume the excess cash would already be in treasurys? Are the profits locked up in various assets and on balance sheets? Trying to get a guage on how much would really be repatriated and if so, isn't it already in treasurys so the net effect wouldn't be very significant?
They estimated $1T would come back to the US (and give the DXY a woody like you wouldn't believe).
How about a compromise...20% instead of 35% and only if you can prove that you created jobs IN THE US with it?
Otherwise they can take their "polite mugger" act on the road and watch their euro-denominated balance sheet cash melt into fucking syrup.
"They estimated $1T would come back to the US (and give the DXY a woody like you wouldn't believe)."
I would contend that the DXY wouldn't respond to that move at all. It's not like Portugal and Spain decided to dump Euros and buy USD to the tune of a half-trillion dollars. (Why is it always a half-trillion? Is that just a nice, round number or what?) China and Japan shot took a shot at it as soon as President Hu's plane touched down in Washington and look what happened to the Euro.
As we all know, the half-life of currency interventions are getting shorter and shorter and this one was a duzy. Jus'sayin'.
But as far as repatriations go, the money is already in dollars and would only change pants pockets, as a poster here so eloquently stated.
Europeans historically love to buy US equities going into a top. If share buybacks raise equities by repatriating USDs, then the feedback may extend to sell EUR buy USD sell CHF buy USD etc ... stranger things have happened.
The "Bonuses during a depression shouldn't just be for the financial sector" Act.
After QE? Ha ha. The only thing that happens after QE2 is QE3
Is this tax holiday going to buy up 50%+ of the Treasury's debt issuance? No it will not, but QE3 will.
To paraphrase King Louis XV of France 'Apres QE, la deluge!'
Yup.
Bruce, at what point will the Fed have to make a choice between supporting Treasury prices or equity prices?
If, by focusing too much on equities, 5 yr+ Treasury yields jump up another 100+bps, then won't the damage to the bond markets, the US Treasury and housing more than offset any gains in the equity markets?
Just saw this article; Vermont Legislature is getting fed-up:
http://www.alternet.org/news/149620/vermont_is_gearing_up_to_strike_a_ma...
Already priced in! We still need real growth and continuing declines in unemployment. The only numbers to watch are gdp and inflation, and if you don't trust gdp numbers look at U6 unemployment instead.
Great piece as always Mr Krasting. Thanks for posting.
Thanks for the interesting questions, Bruce. I always figured that share buybacks were designed to counterbalance the dilution caused by issuing so many in-the-money options to insiders. If the buyback tactic also causes share prices to rise, then non-insider equity holders feel like they're benefiting too, and hence don't complain. Selling a tax holiday will be a little harder, because Joe Sixpack likely doesn't hold any shares in the company being given the free pass. But never fear, the deal will be sold by convincing Joe that if he doesn't let the giant corporations do whatever they want, he'll never work again. By 3Q 2011, unemployment should be high enough that this will be easy to believe.
Why would any fortunate company that has escaped the debasement of the dollar (among other things) go ahead and bring money back into the US?!? On a promise that the government will reduce the tax they have to pay. Sounds alot like breaking back into prison because you just stole a whole shitload of cigarettes to use back at the jail. Why would anyone that has amassed a fortune outside of the US bring it back, and be subject to the current economic environment that Federal, State and local governments have been putting in place?
Continuing the cig analogy, Trajan, one example of a U.S.-domeciled firm which derives fully one hundred percent of its revenue from overseas sources: Philip Morris International.
Or...
It could be a case of the Fed using the Goldman-Sachs Triple-Reverse Psychology Playbook (TM), in that Unca Ben has assured the home-gamers that stocks will not be allowed to go down. Greenspan kicked it off with page one of the Playbook in the fall, when he said that the stock market is up and therefore the economy is good.
Dr. Bernanke has since reiterated those comments, as have other mouth-pieces in the major media. Stir up the pot, from page 14, and have the muni-bond market crater in the belief that money will flow back into equity mutual funds and, sure enough and voila! money flows into domestic equity mutual funds have been on the rise (though not as much as they expected, I think...).
The US Dollar has returned to its strange status as a "risk-on" currency versus the Japanese yen and the Swiss franc. Now, as the stock markets move up, the dollar moves up. If the stock market tumbles, the USD will tumble against those currencies. What happens to the price of oil is anyone's guess, as speculation has once again warped true price discovery and any sudden "risk-off" scenario would see the specs exit, so it would be expected that oil will float between $85-105/bbl.
I wouldn't be at all surprised if the stock market correction happens much, much sooner than you're saying in your piece. In fact, I would venture to say that it is quite at-hand, walking up the drive, so to speak. If that happens, watch the USDJPY plumb new lows while the Swiss franc does some amazing, amazing things. (Think back to Hildebrand's statement about a certain unnamed currency going to fi'ty- cent. I think he wasn't talking about the Euro...). It'll take the EURJPY and the EURUSD along with it. The difference this time is that the Ozzie dollar has also fallen out and will shadow the movement in the USDJPY rather than share an inverse relationship this time.
____________
It's just incredible. Once you think they have it under control and we can finally get some sense of normalcy in the markets, everything has turned back on its head (since the US jobs report in late December 2010...) and the old normal is the new normal again, which is not normal at all.
Honestly, I don't want to be an alarmist and I would prefer to be wrong on this one but if my calculations are correct, when this baby hits 88 miles an hour, you're gonna see some serious shit.
Oops...about to ring the bell.
:D
BTW: SuperBowl Champions- The New York Jets. I bet Bruce is a fan!
More worthwhile reading...
Bob Chapman writes....Debt Continues to Accumulate as the Economic Climate Worsens...
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/bob-chapman-debt-continues-to.html
Reminds me of the line in Jurassic Park.
CEO "When we had control..."
Scientist "That's the illusion, you never had control."
Right now our economy is like a boulder (government / ws) supported by tooth picks which would obviously be main street.
Orly, Do not jinx me. We have a most difficult evening in front of us first.
The Jets did great this year. Better luck next time.
/:
Doesn't look good for the green machine at the half...
Bruce,
Get some fresh air, maybe some snow shoeing in Blue Mountain for an hour. Then you are ready for the Green Machine show.
Sorry.
Then, back on topic...
If They decide to allow the market to crash and the dollar tank (I mean tank...) simultaneously, that could be the catalyst for giant corporations to repatriate their money on their own, without tax incentives.
They would have to use the "extra" cash to shore up their own balance sheets and support their own stocks, ironically with buybacks or dividends. (In other words, they are going to do that either way...). The money comes back to the US, where it gets immediately vaporised into a down market and the next economic leg down really begins- especially after rates start to rise in early summer 2011.
a basic question
guys like Goog and most assuredly GE divert profits to places like Cayman, Bermuda etc via Ireland/Netherlands to reduce taxes. By allowing those $$ to return to the US via a tax holiday is the net effect not simply moving dollars from one pocket to another in the same pair of pants i.e. no net change? And if it is a simple as that unless that money is currently sitting idle who loses on this kind of a maneuver? see this Bloomberg article
Next question - what about monetization of municipal and state debts (QE3/4) - perhaps that is the trick for 2012?
Finally is this one of your 5% opportunities?
__________________
and my O/T comment for this thread an article from InfoWars urrrr I mean Washington Post:
Domestic use of aerial drones by law enforcement
http://www.washingtonpost.com/wp-dyn/content/article/2011/01/22/AR201101...
No. This is not an opportunity. They will screw this up. I am a tad ahad on the last 5%. But I ust admit it is not moving as fast as I had hoped. When I change my mind (suck up a loss) I wil tell you about it.
tanks Bruc
I thin that you might be in nee of a new keyboar
...or an extra finger.
or a new brain...
The third year of the presidential election cycle has not been down since 1939, and has been up for 19 straight occurances. Perhaps it won't be different this time.
Do they take the market down hard first and accumulate ahead of this?
Methinks they forgot to mention that detail to the congress-critters.
Well, QE has to continue or bond rates will go parabolic. I bet they just pare it back a bit around the edges. But lord knows they will probably do both. How else we gonna get to Dow 20,000?
gloomy - that is if you are the original
london banker's blog is back up an running
http://londonbanker.blogspot.com/2011/01/embracing-accountability-starti...
Great to see LB blogging again.
Nice find Salinger.
Tis I!! Hello and thanks for the tip!
there is quite a dispora of former RGEmonitor guests (, Octavio, PeteCA, Blindman, MissAmerica etc... ) and I suspect that while many pop in here that LB could become the destination of choice for that group (since he generally posts only a couple of times a week)
Yes, thanks for the tip! Love ZH, but it very different from that old group at RGE. Kind of like speed demons on steriods here.......Independent Contractor
Wean them off the teat. Welfare time is over for these deadbeats. Let them go make money the old fashioned way, by investing in productive activity.
"At Smith-Barney we make money the old fashioned way; we embezzle it."
Good work Bruce. Learning a little more each day.
Egg suckers at that. Good post Bruce.
Great article, except letting companies keep the money they earned is not giving them a gift.
Also, I don't think all of it would be repatriated even if the gov't promised to set the tax looting rate to zero. Why? Diversification of risk. Who knows what the next Congress or {president could do?
A fox stealing some eggs?
Or is the fox actually throwing up some eggs?
That, my dear readers, is the true question....
sooo..
BTFDYFI ?
Thing is... where is all this money sitting? In overseas bank accounts/stocks/bonds?
If it's repatriated to the US - does that mean we'll see a wave of market crashes outside the US?
The United States has ~200bio invested in Australia. Some of that is direct investment in private equity, but there are also large positions in the general equity market, bonds, deposits and other fixed income instruments.
If the US were to repatriate ALL of that at once (and consider that the FX gain alone would be worth billions), it would have a short term disruptive effect on the AU financial markets, but in the long term, it would be the best thing that ever happened.
You see, US companies don't pay tax to the Australian govt. because of a double taxation treaty we have. So if the ~200bio of asset were purchased by the Eurozone or Asian investors, the tax windfall would amount to somewhere between 20-40bio.
Of course, given AU fed govt long history of blithering incompetence, it may not actually help all that much in the short term, unless of course it enabled them to lower personal income tax rates, which would be marginally beneficial for the economy.
At any rate, it would put an end to US companies stealing money from AU, and probably everywhere else in the world too. Once the investment is repatriated, many countries would probably revisit their taxation treaties with the US, as those treaties only exist to encourage investment.
...Banking reserve requirements are still an issue? Pshaw!
Seriously, that's a good question.