How Effective Have The Fed's QE Programs Been?
Submitted by Lance Roberts of STA Wealth Management,
In the most recent newsletter, I discussed this year's rise in the markets and the fact that all of the gains have occurred during some of the historically weakest months of the year. I also noted a few interesting facts:
- 100% of the year-to-date returns were contained within roughly 50% of trading weeks. (15 positive/14 negative weeks)
- 78.5% of the year-to-date gains have occurred since May 20th.
- 100% of the gains for the year have occurred since April.
These gains have also come at a time when corporate profits are slowing; economic growth remains weak and geopolitical tensions have been on the rise. UBS published a research piece last week entitled 'We are worried' which stated:
“Firstly we are concerned about valuations. We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market.
Second, because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.”
The reason for the rise, of course, is the same as it has been seen 2009 which has been almost solely due to the Federal Reserve’s ongoing liquidity injections into the financial markets. The chart below shows three things from the beginning of 2014:
- The S&P 500
- The monthly NET changes to the Fed’s balance sheet
- The cumulative changes to the Fed’s balance sheet.
When it comes to the financial markets, Senator Chuck Grassley summed it up best by stating that the Federal Reserve was the "...only game in town."
As shown in the chart below, every $1 of growth in the S&P 500 index required just $1.89 of bond purchases.
This inflation of asset prices by the Federal Reserve was a direct goal, rather than a byproduct, of the various monetary policies implemented since 2008. Ben Bernanke, in 2010 following the implementation of QE 2, wrote in an Op-ed for the Washington Post:
"...higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
It is quite clear that Bernanke achieved his goal of inflating asset prices by expanding the Federal Reserve's balance sheet by 371.64% since the end of the financial crisis. However, was he as successful in fulfilling his other objectives? The following charts perform the same cost/benefit analysis as shown above for each of the metrics that Bernanke detailed above.
Wages To Profits Ratio
(Note: The total working age population (ages 16-64) grew by 5.41% during the same period. There is NO evidence that the Fed's monetary interventions had any impact on employment growth.)
Employment - Not In Labor Force
In December of 2013, Ben Bernanke stated:
"I'm pretty comfortable with the idea that this program did in fact create jobs."
First, businesses create jobs, however, as stated above, there is little evidence that suggests that the job creation was anything other than just the incremental demand created by population growth. Furthermore, it cost roughly 63% less to move someone out of the labor force versus becoming employed. Despite, the Fed's claims that we are nearing "full employment" in the domestic economy, I am quite sure the 90+ million individuals sitting outside the labor force would disagree.
Secondly, while the Federal Reserve achieved its goal of inflating asset prices (the most cost efficient use of their monetary policy at $1.89) it failed to translate into the rest of the economy. The question that the Federal Reserve should be asking is why?
Considering that roughly 85% of Americans have little, or no, money invested in the financial markets the inflation of asset prices have had virtually no effect on their standard of living. In an economy that is roughly 70% driven by consumption, asset price inflation does not provide from additional consumption for those unaffected.
For the majority of "Main Street," household budgets remain strained due to rising costs of living that exceed current wage growth. This has kept consumption weak which has continued to suppress wages, employment, production and investment.
While most of Wall Street continues to insist that the economy has recovered, the effective costs of that recovery, while still extremely muted, has been very expensive. Yes, corporate profits are indeed higher; however, those profits have come at a huge expense on the average worker as shown below.
Did the Fed's monetary intervention programs keep the economy from sliding into a much deeper recession? Probably.
Have the programs been effective in achieving Bernanke's stated goals? Not really.
What the Fed's monetary policy has succeeded in doing is pulling forward future consumption to boost short-term economic growth. This would have been a great success had that process been used to fully deleverage balance sheets, restructure entitlement programs and refinance the government's debt at substantially lower rates. Instead, the flush of liquidity was used to boost corporate profitability and act as a massive transfer of wealth from the middle class to the "rich."
How this all ends is really anyone's guess, however, I suspect that future historians will have much to write on the matter.
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