When $40 Billion Isn't Enough or, Pray for the Retail Investor

clokey's picture

As Mark Grant so poignantly reminded us yesterday, the Fed is printing $188 million per hour. That is the cost of Dow 14,000 -- that is the price we pay to see the mainstream financial news media consecrate the new bull market via impromptu CNBC specials. This hourly rate is of course implied by the $85 billion of assets the Fed now buys each and every month. Why $85 billion? The official answer is that given by the FOMC in December:

"The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. "

Of course, "policy accommodation" has proven somewhat ineffective when it comes to promoting "sustained improvement in labor market conditions." Worse, it might reasonably be argued that Fed policy has proven entirely ineffective at ameliorating general economic malaise. Even Bernanke himself admits that "obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual --how the economy would have performed in the absence of the Federal Reserve's actions-- cannot be directly observed." As I noted in a recent article, this essentially means that the clueless public is supposed to simply take the Fed's word for it when it comes to evaluating how the economy would be performing in the absence of successive iterations of quantitative easing even as the entirely observable and in many cases quantifiable risks produced by LSAP continue to accumulate and feed off each other.

If the positive effects of Fed policy are illusory and/or unobservable at best and may not even exist at worst, why bother printing another $45 billion per month? The answer might well be that what the Fed thought was going to happen after the announcement of QE3 didn't in fact happen. Recall Bernanke's explanation of the so-called "wealth effect" he hoped to create by purchasing $40 billion per month in MBS:

"…if people feel that their financial situation is better because their 401(k) looks better or for whatever reason --  they're more willing to go out and spend, and that's going to provide the demand that firms need in order to be willing to hire and to invest."

Blame it on whatever you like -- fiscal cliff jitters, the election, the weather -- but the fact is that stocks fell in the wake of QE3 and as such, people's retirement accounts did not look better. Put simply: $40 billion in flow wasn't enough. The Fed should have known this -- after all, Goldman knew it. Recall that back in the summer of last year Goldman's Jan Hatzius said the following about the possibility that the Fed would move to a "flow" model as opposed to a "stock" model for its asset purchases:

"…it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month. Although there has been little talk about the latter option, it enables the committee to respond more flexibly to changing economic conditions and may be optically more attractive if the committee is worried about a political backlash domestically or abroad against further balance sheet expansion."

From a metaphorical perspective, an addict always needs a higher dose to achieve the same high so one might have known that $40 billion per month wouldn't be enough given that over the course of a year, that would only amount to $480 billion, $120 billion short of QE2. From a more practical perspective, Goldman was projecting $50-$75 billion if the Fed went the "flow" route so it's clear that the Fed fell short of at least one major firm's expectations. Anyway you cut it the market wanted more -- the addict was chasing the dragon and there was no hope of catching it at a $40 billion per month clip. Consider the following graph which shows the cumulative change in the Fed's SOMA Treasury holdings from November 1 of last year through December 31 plotted with the daily closing price of the S&P 500 (note that the SOMA Treasury holdings are set to zero on November 1 here, so the chart shows just the increase over the specified period, not the total holdings):

Note that as long as the Operation Twist was still operational (that is, as long as the only unsterilized flow coming into the market was via the Fed's MBS purchases), stocks struggled to gain any traction. Now have a look at a second chart which shows the cumulative change in the Fed's SOMA Treasury holdings from January 3 of this year to March 5 when the Dow hit its all-time high (again, the SOMA Treasury holdings are set to zero on January 1, so the chart shows just the increase from the first of the year through March 5, not the Fed's total holdings) :

One can see that as soon as QE-eternity was implemented (i.e. as soon as the addict's dosage was upped to a $1.02 trillion per year pace as opposed to a mere $420 billion per year clip) stocks took off and made new highs in just a little over two months. Let us not forget amidst all of the celebrating that these are merely nominal highs. Stocks are down some 48% and 84% respectively since 2007 when priced in Swiss francs and gold values. This matters not to the financial punditry -- highs are highs. What is disturbing is the general failure on the part of the mainstream financial media to adequately convey the danger in throwing one's money behind a market that is entirely beholden to the Fed.

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ElvisDog's picture

I won't feel sorry for the investing public any more than I feel sorry for middle class Chinese investing their entire life savings into Shanghai apartments. You want to be greedy? You want money for nothing? Then you take your chances.

Bicycle Repairman's picture

Did Cramer get people out of the high tech crash?

DeadFred's picture

My recollection is he thought the Lehman Bros. thing was a great buying opportunity. People who buy snake oil from a snake oil salesman get what they paid for- snake oil.

Racer's picture

Record highs for petrol and diesel in the UK makes me feel very uneasy about spending anything apart from on necessities

andrewp111's picture

I remember the crash of 1987. When it finally does come, it could come so fast that Cramer won't tell us in time. Of course, Cramer will say he told us to get out, even if it is on the day of the crash.

q99x2's picture

Half the people don't want to work at a dead end job when all they have to do is BTFD. Party's on bro. Bernanke went nuts.

Never One Roach's picture

The 'retail investor' may simply be wiser now.  Also, these RIs may need cash for mortgages, car loans, iPads, NFLX subscriptions, Walmart sprees, Thingamajigs, and so on.  Maybe even food.  My life ins agent tells me clients are cashing in their policies fastest time ever. It might be b/c the know the value of their policy is oroded by the ongoing 68% inflation but  it may also be caused by need to buy food and necessities.

Its_the_economy_stupid's picture

Why am I so angry all the time?

Downtoolong's picture

Even Bernanke himself admits that "obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult

That's usually the case when you fire a ten guage shotgun ten times into the dark.


ebworthen's picture

Did Cramer or any of the other plethora of financial advisors tell their investors to get out in time last time?

Are retirement accounts "worth more" than they were FIVE YEARS AGO!?!?!?

NO.  Considering inflation and devaluation of assets they have lost a great deal of value. 

Priced in Gold they are worth half what they were in 2008 at the least.

AND, that money is still trapped in the casino. 


Dr_Lucid's picture

From my own moral compass, I think one of the greatest sins man can committ is to fleece his brothers, sisters and minds of the poor and uninformed in order to save his own job.  The talking heads on CNBC, in my own mind, rate the same as serial killers, enemies of the state and insurance salesmen.  They are skewing the truth and are afraid to shed light on what the reality of 401(k) balances means to middle american workers.

Instead, Americans as being duped by the mindless chatter of "new highs" and "breaking records" . Some quick and dirty back of the napkin math here and a 401(k) reality check for the DIY investors who listen to NPR and CNBC world do this market a world of good:

Total 401(k) assets in 2007
$9.18 trillion

Total 401(k) assets Q3 2012
$10.34 trillion.

As a whole, these figures may sound like a win for retirement savers right? But think about this.  Those with 401(k) balances were also working so the extra trillion-plus that investors accumulated in the five-and-a-half years after the last high doesn’t look that impressive in percentage terms:

It represents gains of about 2.4% a year. And adjusted for inflation, balances have risen by a total of just 1.46%–for an annualized return that’s a hair under 0.3%.

Considering that many retirement-planning scenarios count on a pre-inflation return of 6% or more, it certainly suggests that many savers remain well behind where they’d hoped to be.

the not so mighty maximiza's picture

dynomite post, diabolical truth

andrewp111's picture

Cramer told us to get out about two weeks before Lehman blew up. That was pretty late as the bears and shorts were already having a party with vulnerable financial companies.

Middle_Finger_Market's picture

Looks like she gonna blow paw. 

El Hosel's picture

If she blows paw she will blow anybody.

Osmium's picture

Amazing what a comma or a missing comma can do.