Today is the first
day of the post-QE2 economy. We’ve been living under the influence of liquidity
injections for the last months. And we enjoyed a spectacular rally that pushed
the S&P 500 up 300 points, from 1,050 to 1,360 between September and April.
At this point,
there’s probably not much reason for us to consider the success of QE2. On the
one hand, it cost $600 billion to increase the market cap of the S&P 500 by 30%.
That’s about $3 trillion in market cap. From that perspective, each of the Fed’s
$600 billion created $5 in stock valuation.
And investors did
take notice (and profits): individual investors have withdrawn $52 U.S. equity
mutual funds over the last 9 months. That sum doesn’t offset losses from the
financial crisis, but most investors probably didn’t meaningfully participate in
that rally, even though profits were there for the taking.
On the other
hand, QE2 was inflationary. The IMF says that a $10-per-barrel rise in oil
prices shaves a half-point off U.S. GDP growth. Oil prices rose around $20 a
barrel during QE2. So, perhaps we lost a full point of GDP growth, around $1
trillion as consumers had to spend more on energy (and food) and less on other
Clearly, this is
not detailed analysis. There are many more variables at play here. And we can
never know how the economy might have performed without QE2. But it’s as hard to
call QE2 a complete disaster as it is to call it a roaring success.
The bigger issue,
for me, is that QE2 pushes the limit of what’s acceptable. If the Fed feels free
to engage in quantitative easing every time the economy slows, then the U.S.
economy will always be imbalanced.
At some point, the
U.S. must take its medicine for debt, prices, and jobs. Employment levels and
prices must adjust for the current economy, and then grow at a sustainable rate.
So far, that’s only happening in fits and starts, due to stimulus measures
designed to ease the pain. But these measures only delay the inevitable. There
is still debt to be worked off (housing), and demand can’t normalize until debt
is worked through.
In any event,
QE2 has ended, and it’s likely to be a non-event. The market appears to have
adjusted stock prices for the end of QE2.
Still there is
much debate about current valuations and economic growth through the end of the
year. The coming 2Q earnings season will be very important for the second half
of the year.
Also important is
how Congress deals with the budget deficit. Simply cutting spending is only half
of the solution. The jobs market also needs to be addressed: retraining, adult
education — something needs to be put in place to make the unemployed more
employable. Simply waiting for the housing market to recover isn’t going to cut
If it’s any
help, FedEx (NYSE:FDX) reported a solid quarter this morning and raised its
estimates for the current quarter and its fiscal 2012. Notably, the CEO said
that "cost headwinds" were subsiding.
make a good barometer for economic activity. The benefit from increased business
activity, and are very much affected by rising oil prices. So if the headwinds
are subsiding, that may bode well…
I’ve held FedEx in
my $100K Portfolio
since it was $82 a share. In January of 2009, I put up $100,000 of my own money
to show investors how grow their wealth in the stock market. The overall
portfolio is up 44% since.
For more on what
I’m buying and selling, click