A mega fixed income deal for GE:
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GE raised $2Bn of three-year money at a very cheap 86Bp and $3Bn of ten-year cash at a rate of 2.73%. The financing produces a blended cost of 1.98% (1.6% after tax) for an average life of 6 years. That’s a hell of a deal for the boys at GE. (Note: as part of the deal GE did a $2B slug of 30 year, this was done to push out the average life of the company's liabilities.)
GE is a complex company with big bucks going in and out. Therefore it’s not possible to tie this deal as a Source for a specific Use. I’ll do it anyway.
GE pays a quarterly dividend of 17 cents a share. Over the next year, that will come to $5Bn. At today’s closing price of 22.93, GE’s dividend produces a return for investors of 2.98%. In other words, GE just funded it annual dividend with a positive carry. (After-tax debt cost of 1.6% versus the 2.98% dividend.)
When Bernanke saw the headlines about the GE deal he probably jumped for joy and called his dovey pals at the Fed to share the “good” news. In fact, this is exactly what Ben wants to see. GE is arbing the credit markets. The Fed has made this possible. Ben thinks that GE increasing debt, and returning money to shareholders is evidence of a positive transmission of his monetary policy.
Me? I think Ben’s monetary policies will not have any positive consequences in the near term, and someday will result in a big price tag for the country. In the mean time the folks at GE are talking the money and laughing. After all, they are sitting on $100Bn in cash. GE had this to say:
This issuance is consistent with our strategy to be opportunistic in accessing markets.
“Opportunistic” indeed. Yet Ben is giving High Fives.
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On Ben’s Words
Bernanke was talking the other day. He was selling the idea that QE is just a normal operation for a central bank. He attempted to convince people that what the Fed is doing is reversible. His words:
At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size.
Let me first focus on Ben’s last words, “return its balance sheet to a more normal size”. What Ben has admitted is that the current balance sheet of the Fed is “abnormal”. He has also said that he is going to grow the balance sheet further to make it more abnormal (QE3).
I think Ben would be quick to agree that his monetary policies produce abnormal results. He would support his actions by saying we are experiencing abnormal conditions in the economy. This gets back to the questions of, “What is the new normal for unemployment in America?” and “Can abnormal monetary policies like QE move the needle in the economic world of 2012?”
Ben also says that the Fed will, “gradually sell securities or let them mature”. Think of what this statement means.
The Fed has Twisted away most of its holdings of sub 5 year paper, so the issue of normalizing the Fed’s balance sheet by allowing securities to mature would be pushed off for 7-10 years. That’s not monetary policy. That’s a biblical kicking of the can past the horizon.
So Bernanke is telling us the Fed can/will normalize its balance sheet by selling some bonds. This is a joke.
Take Ben on his word; at some point the Fed will normalize its balance sheet, it will do it by selling bonds to the market on a gradual basis. What does that mean? It means that Bernanke would have to sell $60Bn of bonds every month for three years! What would that do for the capital markets? What will the market reaction be to this headline when we get it?
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Ben is lying to us when he says that QE can be reversed without tremendous pain. Bernanke will be long gone as head of the Fed when the bill for QE is finally presented. Ben’s successor will be mired in the mess than he created.
The reality is that there is no viable exit strategy from QE. Ben knows this. So do all the other Doves. Shame on them.
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