Kass: Sell Rosh Hashanah
It could be argued that the finite nature of QE1 and QE2 strategies successfully lifted asset prices without lifting inflationary expectations, but to me, the Fed's QE3 strategy is borderline reckless, as the Fed has removed the constraint on inflationary expectations and on U.S. dollar weakness, which could, in the fullness of time, lead to a loss of control of its balance sheet.
I am skeptical that QE3 (i.e., open-ended purchases of mortgage-backed securities) will mollify the modified liquidity trap we are currently in, and I am skeptical that the labor market and/or real economy will feel any benefits from the recent Fed announcement. In fact, I see the unintended consequences of higher inflation and rising intermediate- to longer-term interest rates as, at the very least, diluting what the Fed is trying to accomplish.
While since June 2012, mortgage-backed securities yields are down by about 40 basis points relative to the yield on the 10-year U.S. note, the yield on the 10- year U.S. note is up by over 40 basis points, so mortgage rates are actually slightly higher in the last three months despite the promise (and now actuality) of easing. I am worried that the U.S. housing market, which the Fed is seemingly targeting, may not even benefit from QE3.
Inflation is taxation without legislation; it is not market-valuation-friendly and could, if severe enough, choke off the consumer. The prospects of more easing have already lifted inflationary expectations (measured by the imbedded inflation rate in TIPS) by over 50 basis points since June 2012.The open-ended nature of QE3 could conceivably reduce the pressure on our leaders to fix our deficit because the cost to finance it is kept artificially low (creating a moral hazard) and owing to the growing perception that Bernanke "has our back." In turn, the U.S. dollar might continue to drop, and competitive devaluation will become a risk, as the Fed will have no credible means of ending QE3. Even though we have concluded that the benefits of easing are small and the consequences are large, the QE3 announcement was followed by pronouncements by many that fundamentals don't matter anymore, as the world's central bankers are giving an all-clear signal. One commentator even said, "You cannot fight the Fed; just buy everything." Excuse me? And ignore economic statistics and political and geopolitical challenges?
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV