Wednesday, October 3, 2012

Evidence QE3 is Working, and Other Lies


A mega fixed income deal for GE:



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.




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?


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.



  1. Great post as always Bruce – I agree 100% with your observations but wonder what would hold the Fed back from simply sitting on all UST’s held until they mature completely (ie 7-10 years). My sense is that they wil keep interest rates low for ‘eons’ – as any increase of say 1% would add an additional $160B in debt servicing costs which they can’t afford to endure. Also, since the US is the ‘cleanest dirty meth addict’ (to borrow an image from Bill Gross) it will continue to attract safe haven interest.

  2. Obviously all true.
    Washington is full of weasels.

  3. I’m going to get a T-Shirt that says I listened to Banana Ben and all I got was massive inflation


  4. And did the lying sack of turd explain how he is going to sell these $60 billion in notes per month without the Fed realizing massive mark to market losses? Its not like there is any curve roll down anymore, and the Fed is now more levered (70x) than Lehman was (45x) when it collapsed

    Oh wait a minute, they don’t talk about reality in academia, and its not included in any of his theoretical models. Ben has absolutely no clue how the real bond market works.

    … as for GE, I can now reveal where they are spending the new money: Jeff Immelt is regularly flying “his” (GE owned) oversized helicopters between his New Caanan home, GE headquarters in Fairfield CT, and Crotonville NY. His New Caanan neighbors are angry, while the staff at headquarters complain that helicopter noise / building shaking is non-stop. In less than half the tenure, Immelt has already taken more helicopter flights than Jack Welch.

    Immelt was previously a manager at GE Medical and before that plastics — Zero experience at GE Capital. He knows as much about finance as Bernanke (perhaps less). Another fish out of water, but he sure gets paid as if he knew what he is doing.

  5. Conscience of a Conservative says:

    What we are seeing is that those with primary access to money benefit from QE & ZIRP and those who do not are hurt on a massive scale. Those that benefit include the very rich, the banks and companies like GE. Those firms and people that must deal with intermediaries are getting crushed.

  6. I came across a Keynes quote from the “Tract on Monetary Reform”. I hadn’t seen it before. It may be relevant.

    “it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier”

    The “Tract on Monetary Reform” is described as the most notoriously inflationary of Keynes’s works.

    • In academic circles and in theory, Keynes was apparently brilliant (much like Bernanke)

      Off campus, in the real world, both caused more harm than good

  7. GE has always been a poorly disguised hedge fund masked as a manufacturing firm. GE Capital has always been a GMAC in railroad overalls.

  8. What you say may be logical and true but explain the better than expected ISM figures; are these a fudge?

  9. The Fed doesn’t have to sell bonds to crash the market. All it has to do is quit buying up gov’t debt and/or MBS (which the beneficiary bank then goes and buys gov’t debt with the proceeds). The deficit ain’t going to get fixed. You’re looking at $90 BILLION per month that needs to be monetized. If the Fed were to abandon QE, that in itself will crash the market. And Congress and whoever wins will NOT fix the deficit.

    The end game is inflation causing political pressure on Ben to stop. $5 gasoline and sky-high food bills. If you want the canary, watch gasoline.

  10. Dave Sternberg says:

    Bruce did you ever think that GE was testing the waters with the new bonds? Did you ever consider that they might be using the new debt to retire some more expensive paper? Why do you think GE needs to issue more debt to pay for the dividend for the year when they clearly have 100 Billion in cash to pay for it in the first place? Leave my GE alone. As for Benny B, well he’s just an ass.