How does the market really feel about QE2?
Despite the Fed's purchase of $600 billion in Treasury bonds, the stock market didn't rally.
Charles Boeddinghaus works at his post with Getco LLC at the New York Stock Exchange, Nov. 17, 2010. The stock market did not respond as expected to the Fed's quantitative easing.
Mark Lennihan / AP
As you remember, dear reader, we decided to hoist our old, tattered “Crash Alert” flag up last week. About mid-week, as we recall.
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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Not that we had any inside information. Mr. Market doesn’t talk to us directly. We just read the papers – just like everyone else.
But what we noticed last week was that the Fed had given stocks, bonds commodities, and gold the biggest push in recorded history…$600 billion was coming into the market. It was long. It was going to stay long. And if it didn’t do the job…there was plenty more where that came from.
Plenty more. Because this money came from nowhere. And if you can get money out of nowhere…you can get a lot of it.
In effect, Ben Bernanke gave the market the Mother of All Puts. Stocks go down? Put them to the Fed. They’ll buy anything.
Yes, Mr. Bernanke is trying to give “risk on” investors a put – protecting them from the downside by adding more and more money. No, investors are not sure this plan is really going to do them any good. The stock market went up only very briefly on the day following Mr. Bernanke’s announcement. Then, there was no follow-through.
All very well to get hot and bothered speculating on the fall of the dollar (and the rise of everything else). But there is something so desperate and foolhardy in Mr. Bernanke’s money-printing, it just doesn’t feel right. It feels more like something a banana republic would do.
A New York Times article last week compared the US to a Banana Republic. It pointed out that the rich have gotten a lot richer than the poor. A pity. The author – Nicholas Kristof – missed the point completely. He thinks he knows how much people should earn and believes the difference in income – in itself – is the problem.
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.
At a time of 9.6 percent unemployment, wouldn’t it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.
