The Effect of Quantitative Easing on Stock Prices

What effect did the Federal Reserve's quantitative easing programs have on U.S. stock prices in the three years from November 2008, when it was first suggested, and today?

To find out, we'll do an event analysis - we'll match up the level of stock prices as measured by the S&P 500 with the timing of the Federal Reserve's announcements and implementation of its two rounds of quantitative easing (aka "QE1" and "QE2").

The Federal Reserve Bank of St. Louis maintains a timeline of the events and policy actions that have been taken with respect to the financial crises since 2007. Here are the key milestones with respect to the Fed's quantitative easing programs, along with some other notable events. Our chart below shows the overall timeline over the past three years:

Beginning the timeline:

A. 25 November 2008

The Federal Reserve Board announces a new program to purchase direct obligations of housing related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac and Federal Home Loan Banks—and MBS backed by the GSEs. Purchases of up to $100 billion in GSE direct obligations will be conducted as auctions among Federal Reserve primary dealers. Purchases of up to $500 billion in MBS will be conducted by asset managers.

B. 16 December 2008

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

C. 28 January 2009

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

D. 13 February 2009

U.S. Congress approves President Barack Obama's "Stimulus Package". The measure will inject an estimated $787 billion (the CBO estimates that $821 billion was actually spent) into the U.S. economy through a variety of tax credits, transfers to support state government programs and "shovel ready" infrastructure projects. The measure is signed into law on 17 February 2009.

E. 9 March 2009

The stock market bottoms. After this point, stock prices begin rising as the rate at which business conditions are worsening begins to decelerate.

F. 18 March 2009

The FOMC votes to maintain the target range for the effective federal funds at 0 to 0.25 percent. In addition, the FOMC decides to increase the size of the Federal Reserve's balance sheet by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. The FOMC also decides to purchase up to $300 billion of longer-term Treasury securities over the next six months to help improve conditions in private credit markets. Finally, the FOMC announces that it anticipates expanding the range of eligible collateral for the TALF (Term Asset-Backed Securities Loan Facility).

The Federal Reserve Bank of New York releases more information on the Federal Reserve's plan to purchase Treasury securities. The Desk will concentrate its purchases in nominal maturities ranging from 2 to 10 years. The purchases will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will occur two to three times a week. The Desk plans to hold the first purchase operation late next week.

G. 16 March 2010

The FOMC announces that "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

"In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral."

H. 31 March 2010

QE1 ends.

At first, investors appeared to have shared the Fed's assessment that it had successfully combatted the deflationary forces that had appeared set to overrun the U.S. economy, as stock prices continued to rise for nearly a month after the end of QE1. But over the next several months, expectations for deflationary conditions in the U.S. re-established themselves, sending stock prices approximately 10-15% lower. The Fed responded to the resurgence of deflationary expectations by launching a new round of quantitative easing, now known as QE2.

I. 10 August 2010

The FOMC agrees to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

J. 27 August 2010

Federal Reserve chairman Ben Bernanke states that "The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly", and that he believes "that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions."

The Fed's first announcement was aimed at reassuring investors that the Fed wouldn't seek to immediately unload the securities it had bought up in its first round of quantitative easing, which could negatively impact markets in that a sudden increase in the supply of these securities being unloaded would push their prices downward.

But that wasn't enough to assure investors, which eventually led Fed Chairman Ben Bernanke to firmly commit to a new round of quantitative easing.

Here, it appears that the announcement that the Fed would indeed initiate a new round of quantitative easing had a strong effect upon stock prices, leading them higher well before the program actually went into effect. The lack of a similar effect when the Fed first announced it would initiate QE1 might be attributable to the unfamiliarity of investors at the time with what the Fed might be able to achieve with such a program, which had never previously been attempted in the United States. The Fed's apparent "success" with its previous round of quantitative easing gave it credibility among investors ahead of the second round, who responded positively.

Resuming the timeline:

K. 3 November 2010

The FOMC announces its decision to expand its holdings of securities in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings and to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

L. 22 June 2011

The FOMC announces that "The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

M. 30 June 2011

QE2 ends, with no immediate plans for a third round of quantitative easing.

Since QE2 ended, stock prices have been fairly volatile, with the S&P 500 ranging from a high of 1353.22 on 7 July 2011 to a low of 1099.23 on 3 October 2011. At present, they're approximately 10% below where they were shortly after the end of QE2, as the S&P 500 closed at 1192.55 on 28 November 2011.

The Fed's "turning on" and "turning off" of its quantitative easing programs gives us the ability to measure how much they've affected stock prices in the United States. Judging by how much stock prices have changed from the "on" to "off" conditions, we estimate that the Federal Reserve's quantitative easing programs, which have affected investors' expectations of future inflation, contributed approximately 10-15% to the value of stock prices when "on".

One interesting observation we have is that it appears that investors "buy into" the Fed's initial assessment that there's no additional need for its quantitative easing programs for up to about a month afterward. And then, they adjust their perceptions to reflect changing conditions.

It would be interesting to observe the stock trades of Federal Reserve officials to see if they have the same kind of investing "luck" as the members of the U.S. Congress or their staffs.

From Brazil, With Love

How dependent has the United States government under President Barack Obama become upon borrowing money from foreign sources to support its spending?

Would you believe the answer is: "enough to exclude a long-time U.S. manufacturer from consideration for a defense contract in favor of a foreign-based manufacturer, despite the U.S. manufacturer having invested considerable time and profits earned from their other products to develop a product that specifically satisfies the government's needs?"

AINonline's Chris Pocock reports:

The U.S. Air Force has apparently chosen the Embraer Super Tucano to meet the Light Air Support (LAS) requirement. Hawker Beechcraft's AT-6 was the other contender. No official announcement has yet been made, but Hawker Beechcraft said it received a letter from the USAF that excluded the AT-6 from the hotly contested competition. The company is protesting the decision to the U.S. Government Accountability Office (GAO).

The LAS competition was designed to produce an alternative to jet combat aircraft for counter-insurgency operations. The Air Force planned to buy 15 aircraft for a training school at Eglin AFB, Fla., but had not confirmed plans to equip any of its own squadrons.

However, the U.S. was expected to supply or sell LAS aircraft to various countries, starting with 20 for Afghanistan. It was this potential that led Hawker Beechcraft and partners to spend “more than $100 million to meet the Air Force's specific requirements,” the company said.

Last month, Hawker Beechcraft completed weapons drop tests with the AT-6, a modification of the successful T-6 primary trainer on which all U.S. military pilots graduate.

Meanwhile, Embraer teamed with Sierra Nevada Corp to offer the EMB-314 Super Tucano, and said it would assemble the aircraft in a new facility at Jacksonville, Fla.

Manufacturing.net carries the Associated Press' article, which describes the size of the contract, as well as the Hawker Beechcraft's investment in its AT-6 program (emphasis ours):

WICHITA, Kan. (AP) -- The Air Force has notified Hawker Beechcraft Corp. that its Beechcraft AT-6 has been excluded from competition to build a light attack aircraft, a contract worth nearly $1 billion, the company said.

The company had hoped to its AT-6, an armed version of its T-6 trainer, would be chosen for the Light AirSupport Counter Insurgency aircraft for the Afghanistan National Army Corps. The chosen aircraft also would be used as a light attack armed reconnaissance aircraft for the U.S. Air Force.

The piston planes are designed for counterinsurgency, close air support, armed overwatch and homeland security, The Wichita Eagle reported (http://bit.ly/ud7FDM).

Hawker Beechcraft officials said in a news release that they were "confounded and troubled" by the Air Force's decision. The company said it is asking the Air Force for an explanation and will explore all options.

Hawker Beechcraft said it had been working with the Air Force for two years and had invested more than $100 million to meet the Air Force's requirements for the plane. It noted that the Beechcraft AT-6 had been found capable of meeting the requirements in a demonstration program led by the Air National Guard.

It's all the more remarkable because the U.S. company has been laying off its workers given the current economic climate.

By contrast, Hawker Beechcraft's competition for the defense contract, Brazil's Embraer, is under investigation by the SEC into possible corrupt practices. The Wall Street Journal's Paulo Winterstein reports:

Brazil's Embraer SA, the world's No. 4 aircraft maker, said Friday that an investigation by the U.S. Securities and Exchange Commission into possible corrupt practices shouldn't hurt the company's chances of selling planes to the U.S. military.

The company said Thursday that it was subpoenaed by the SEC, but Chief Executive Frederico Curado said Friday the investigation in itself shouldn't affect its ongoing bid to sell Super Tucano aircraft to the U.S. Air Force. Mr. Curado said he expects the government to announce a decision within "weeks" on a contract reportedly valued at $1.5 billion.

"This is a new process for us but as far as we understand it, the investigation won't have an impact," he said in a conference call with journalists. "Restrictions in dealings with the U.S. government would come only after a conviction."

Embraer said that the SEC and U.S. Justice Department are investigating possible breaches of the U.S. Foreign Corrupt Practices Act, which prohibits company officials from making payments to government officers to get or keep business. The company declined to give details beyond saying that the investigation is related to Embraer business dealings in three countries.

So how does the United States' federal government's need to borrow large amounts of money from foreign sources perhaps come into play in stacking the deck against of a mid-size U.S. manufacturer against the fourth-largest maker of aircraft in the world for a U.S. defense contract?

As the fifth largest major foreign holder of U.S. debt, one whose share of that debt has been growing consistently for several years, the Obama administration may well have made a strategic decision to favor Brazil's Embraer company as a reward for Brazil's growing ranking among all foreign holders of U.S. government-issued debt.

With a good portion of Embraer's Super Tucano aircraft being manufactured outside the United States, the move will increase the U.S.' trade deficit in goods and services with Brazil, which in turn, will be balanced by the U.S. government's "export" of U.S. Treasury securities to Brazil.

The move is strategic because developing Brazil as a major holder of U.S. government-issued debt would offset China's outsize influence over the United States given its status as the largest foreign holder of U.S. Treasury securities. Since China has previously flexed its muscles with respect to its interests through the markets for U.S. Treasurhes, the Obama administration is likely seeking to reduce its potential influence.

That influence is substantial. Through the end of September 2011, the U.S. Treasury reports that China holds $1.15 trillion in U.S. government-issued securities directly, and another $109 billion indirectly through Hong Kong. Meanwhile, a very large portion of the United Kingdom's reported U.S. government debt holdings of $421.6 billion are actually controlled by Chinese interests. The figure currently recorded for the U.K. is largely a consequence of the nation's position as a major international banking center, which will be revised in several months time to reflect actual holdings by nation.

The bottom line is that if a comparatively small U.S. manufacturer of airplanes with a major investment in its future to develop an aircraft that can do what the U.S. government wants and can demonstrate that's the case needs to be pushed aside in favor of a foreign manufacturer with considerable ethical issues regarding its business practices, and if doing so will help it borrow more money to spend, then that's what the Obama administration will do.

Lackluster GDP in 2011-Q3, More in 2011-Q4

The U.S. Bureau of Economic Analysis has revised its initial estimate of GDP in the third quarter of GDP downward. We've adjusted our GDP forecast for the fourth quarter of 2011 accordingly.

Using our preferred Modified Limo method for forecasting GDP, we anticipate that U.S. GDP for the fourth quarter of 2011 has roughly a 68% probability of being between $13,252.9 billion and $13,533.7 billion in terms of constant 2005 U.S. dollars. It has a 99.7% probability of falling between $12,972.5 billion and $13,814.5 billion. The midpoint for our forecast range for GDP in 2011-Q4 using the data available to us now is $13,393.3 billion, in terms of constant 2005 U.S. dollars.

Looking at where U.S. GDP for the third quarter of 2011 has now been adjusted, we note that the midpoint of our forecast range for this quarter is now within 0.28% of where the BEA has revised its GDP estimate.

There will be one more scheduled revision of GDP data for this quarter. We will update our forecast for 2011-Q4 GDP accordingly when this third estimate is released.

Looking backward, our GDP temperature gauges show how the United States' economy has performed over the past three to four quarters with respect to its historical performance since 1980.

In these charts, the temperature spectrum runs from the "cold" purple range, indicating recessionary conditions, through the "cool" blue range, the "comfortable" green range, which indicates solid economic growth, and on through the more "heated" yellow range on up to the "overheated" red range, which are self-explanatory.

Of these two charts, the Two-Quarter GDP Temperature Gauge provides the better indication of how the U.S. economy has performed over time. We present the One-Quarter GDP Temperature Gauge since its data corresponds to the annualized GDP growth rates reported for each quarter in the media.

Here, the Two-Quarter GDP Temperature Gauge, which covers the two-quarter long intervals of 2010-Q3 through 2011-Q1 (two periods ago), 2010-Q4 through 2011-Q2 (one period ago) and 2011-Q1 through 2011-Q3 (the most recent period) reveals that the U.S. economy over the past year has ranged from recessionary levels, as indicated by the very "cold" purple color to near-recessionary levels, as indicated by the "cool" blue color, which are characterized by lackluster economic growth.

Since the U.S. economy's performance is largely driven by inertia, we anticipate that this lackluster performance will continue well into 2012.

Thanksgiving 2011: What to Do with the Leftovers?

It's the age old American dilemma of what to do with the remains of the bird following the Thanksgiving holiday, while not doing any more to continue sending your Body Mass Index in the wrong direction. This year, we're featuring Cooking Light's recipe suggestions for what to do with all that's left behind!

Turkey burnout is insidious. One minute your bird is beautiful and fragrant, floating majestically to the table, its crisp skin glistening. You could eat every last bite all by yourself. But in a twinkling―or, to be exact, after a couple of servings―the feast loses its luster. By the time the candles have been snuffed, the good china put away, and the wine glasses washed, what's left of your 20-pounder looks like just one more responsibility. Worse, the week ahead looms with the dreary prospects of turkey hash, turkey supreme, and turkey a la king. For a moment, you consider getting a really big dog.

Not to sound unsympathetic, but snap out of it! Strip that bird straightaway with a sharp knife, and quickly refrigerate the white and dark meat in separate airtight containers (for up to five days or freeze for up to two months). Don't labor over the bones and fatty "parson's nose," telling yourself you'll boil them down into soup stock―you know you won't be in the mood for that anytime soon. Toss 'em, and be done with it. Feel better? You should. You've cleared the slate for a fresh approach to this versatile, forgiving meat and stocked a ready-to-use supply.

These recipes give your leftovers a new life, without ever resorting to a turkey-noodle surprise.

Cooking Light's recipe suggestions include:

• Curried Turkey Soup


• Chutney-Turkey Salad on Focaccia


• The Classic Hot Brown


• Cheddar Cheese Sauce


• Creamy Triple-Mushroom Bisque with Turkey


• Fiery Turkey-Pâté Crostini


• Devil in Your Pocket


• White Turkey Chili

Enjoy!

American Conservative Political Philosophy

The Classical Conservative Definition:
A classical conservative values tradition and freedom over governmental power. Conservatives, under this definition, advocate a free market economy without governmental intervention. Conservatives tend to view government as a necessary evil, whose primary responsibility is to protect people from violation of their rights and freedom by others. Conservatives distinguish this from government taking action to guarantee people's rights and freedom (a subtle, but important distinction). Conservatives think of morality as something that binds people into groups through loyalty and authority (in certain cases, substituting religion for authority). Conservatives tend to be tribalists.

There is likely not as much difference between the two philosophies as you may have thought. The distinctions are subtle, but they do lead to a different philosophy of both the purpose, and responsibilities of government. Distinctions between the two philosophies shift and morph to suit the politics of the day.

Conservatives are usually regarded as associated with the Republican Party, liberals with the Democratic Party. This is an over-generalization.

Both parties embrace certain conservative and liberal tendencies. Moreover, it does not account for those that do not affiliate with either party, standing as independents, a very large segment of America's political society.

Start The Campaign Early For Political Science Scholarships

Many policy and decisions makers, and some of the country's most influential people, got their start by studying political science. If you plan to major in poli sci in college you better hit the campaign trail early if you're interested in receiving political science scholarships.

Most colleges offer political science scholarships through their political science departments. These grants, fellowships and awards are often given in honor of alumni or local community leaders.

The big political science scholarship bucks, however, lie with national organizations, many of which fall into the public policy center/institute/endowment arena. This is a double edged sword. On one hand, there are lots of institutes with lots of scholarship dollars to pass out. On the other, most of the scholarships pull applicants from across the nation so there is plenty of competition.

A good place to start looking for political science scholarships is the APSA. The American Political Science Association is a professional organization with 15,000 members in 80 countries. One of the group's many undertakings is a scholarship program.