QE3nfinity and how that affects ERE

ktn · Post by **ktn** » Sat Sep 15, 2012 10:59 am

I am trying to get my head around QE3 and what it means for us, ERE hopefuls.
QE3 has also been dubbed 'QE Infinity' because unlike past Quantitative Easings, this one has no limits on it.
So the US Federal Reserve announced its third attempt at fiscal stimulation:

- Sure enough, stock markets (I assume because printing more money is seen as an indication of the market bottoming) and commodity prices went up (on the back of more money chasing the same limited resources)

- The dollar should weaken, good for US exporters

- For sure, this increase in money supply will mean inflation

- I doubt it will make wages go up (i.e. keep up with inflation)

- The fed is hoping it will eventually make companies hire Americans in USA
This isn't great news for the savers among us. It means that if we leave our money in the bank, real returns will be negative for quite a while. With cheap (close to zero-interest) money available, bond rates should go down too.
If you are a saver and debt-averse, that means we are left with the choice of investing our savings in what - stocks, commodities and real-estate? All of which should be beginning to bubble up, i.e. increasing our risk exposure and making us having to time the market again. Not a happy feeling if risk isn't your thing.
BTW, I am not convinced the Fed's timing of this is right. I am not convinced America has geared down (reduced total debt) sufficiently that it can start the process of gearing up (increase debt) already. But this is probably better left to another thread.
So, question: how are you planning to deal with (or take advantage of) this situation?
Thanks in advance!

jennypenny · Post by **jennypenny** » Sat Sep 15, 2012 1:52 pm

I'm still thinking things over, but my plan (so far) looks like this:
* Refinance mortgage again if the rates dip significantly (which they should). I'll take the longest mortgage term I can get under 3%. I know a lot of people here are debt-averse, but I'll take as much money as they'll give me under 3%.
* It seems that purchasing needed items for ERE should be done now before inflation takes hold. As long as technology wouldn't make the item cheaper in the future (like computers) then I will look into purchasing it now.
* I'm going to take some more profits by the end of the month and sit on more cash.
* I'm going to brush up on my economic history. I downloaded "When Money Dies" yesterday.

secretwealth · Post by **secretwealth** » Sat Sep 15, 2012 2:01 pm

I don't think we're going to see high inflation because of this. I am probably a minority here, but I think we need QE because there isn't enough money in the system.
Obviously, quantitative easing is great for stocks, so I guess the lesson is buy stocks. Despite the recent rally, the S&P P/E is pretty low, so there's room for stocks to go up more and more.

Post by **jacob** » Sat Sep 15, 2012 2:32 pm

Unlike the P/E secretwealth is looking at, the one I'm looking at (Shiller P/E 10) says stocks are overvalued by 1 standard deviation. ---So the probability of further multiplier increases is only 16%. Are earnings going higher? Look at margins which are also historically high. Look at the economy. That's a lot of headwind.
My limit orders to sell are triggering which means excess cash. This is highly annoying.
I'd either set things up to partake in the commodity bubble or buy a house (or, I guess, more houses).

secretwealth · Post by **secretwealth** » Sat Sep 15, 2012 2:42 pm

Overvalued by 1 standard deviation seems okay to me. We haven't seen such a low P/E for the market since the mid-90's.

Christopherjart · Post by **Christopherjart** » Sat Sep 15, 2012 3:53 pm

I've been looking at this from the outside. Here in Mexico, investors seem to be encouraged when they see the USA FED doing these things. I imagine that many US investors are also investing in Mexican cetes and bonds too since the rates (and inflation) are higher here. I suppose it means we'd export less, but if the US economy is ok, people would have more money to buy what is exported.
Thankfully the dollar has been devaluing against the peso recently instead of dragging the peso down with it like it normally does.
Personally, unless I open an online US brokerage account (I'm American, but I don't know if they'd accept a non-USA address and transfers from mexican accounts or paypal), I'll keep investing locally. The bank that I have my brokerage account with (Banamex which had been bought by Citibank) has some international mutual funds but not one specifically for the USA or Canada.

jennypenny · Post by **jennypenny** » Sat Sep 15, 2012 4:02 pm

I should have specified that I'm in favor of having a large, cheap mortgage on my residence so I have excess cash available to purchase farmland and/or investment property (without increasing the amount of money I have allocated to real estate).
What I can't figure out is how this will affect bonds. I own a significant amount right now (through bond funds, Wellington, and Wellesley) and I'm not sure how they will be affected.

Post by **jacob** » Sat Sep 15, 2012 5:17 pm

The Feds are "easing" by buying long bonds in the open market. The bonds go on the Feds' balance sheet, where they do nothing, in return cash leaves (is figuratively printed) the Feds and ends up on the balance sheet of the sellers'.
What QE does is turning long-bonds into zero-bonds (=cash). They're reducing the duration of the debt (think of cash as a kind of debt that can be paid back immediately) market. This means that if the value was the same, it would be paid back faster. In other words "financial time" speeds up.
So what you have now is "two markets". The new fast market where the new money goes. And the old market (of existing bonds before QE) where some bonds left.
The new market has more money which moves faster so asset values here will increase. Hence QE boosts stocks and supposedly the economy (unless business owners and banks hit the brakes saying "thanks for the money, but there's really nothing I want to invest in because I already have enough money to invest and would have done so if there were actual opportunities ... kinda like ERE and xmas presents). But QE also hurts the old market where financial time was running slower. So while there's an initial boost to the banks (and the government) which sold the bonds, it ultimately hurts the entire bond market.
What to do?
Move to shorter durations (short and medium terms bonds and dividend payers). Like PIMCO said a few months ago.

jennypenny · Post by **jennypenny** » Sat Sep 15, 2012 6:10 pm

Thanks. I read that PIMCO article (ha! you've got me reading all of their stuff now) and I moved into med/high grade shorter duration bond funds. (my bonds are in 401Ks so my options are limited to funds)
I'm not sure about W/W. I've been in them for years, and I was happy with the way they weathered 2000 and 2008-2009. The funds are primarily for income. Once you can get into their admiral funds the fees are very low which also helps.
I always wonder what will happen when the boomers retire. Everyone talks about working longer and delaying retirement, but I imagine when the economy improves and interest rates rise they will retire en masse. Will they automatically shift into bonds which would make them more attractive, right? (the bonds, not the boomers) Or will traditional retirement planning change and boomers will keep a higher percentage in stocks? Or will interest rates be so high in 10 years that they just shift into CD-type instruments?
The boomers have been a monkey wrench in most things for my entire life, so it wouldn't surprise me if they threw the market for an unexpected loop on the way out the door...

J_ · Post by J_ » Sat Sep 15, 2012 6:36 pm

Jenny: Am I a monkey wrench? A tool I do not have. What does it mean?
Sounds very inspiring!

jennypenny · Post by **jennypenny** » Sat Sep 15, 2012 6:45 pm

@J_--I'm sorry if I wasn't clear. It's not actually. It's usually meant to describe something disruptive. That's how the boomers have felt here in the US, although maybe it's just my take as a GenXer having to follow behind them. Politicians and policy makers pander to them because they are such a large group. It can be frustrating because *generally* their values seem at odds with the values of other groups.

J_ · Post by J_ » Sat Sep 15, 2012 7:18 pm

Haha jenny, I felt already that being a boomer was not so nice. I think that I am about the same age as your parents: so you see them as "disruptive" for your entire life...
I think you're right, without them you would't be there....
But back to your point: most of my fellow boomers I know (in the Netherlands and Europe) are going to get there pensions, which they cannot influence since they were obliged to invest them in pension funds. So I do not expect that they will change a lot in the financial market.

I have steered free (for a big part) to become tied to a pension-fund. I concentrate not on growth but on keeping about the same buying capacity. Perhaps that will be the same for many of my age.

jennypenny · Post by **jennypenny** » Sat Sep 15, 2012 7:43 pm

Sorry, OT...

@J_--The fact that you're on this forum makes you different from most boomers. And I suspect the aspects of the boomer generation that I find frustrating are unique to the US. In the US, they refer to themselves as "the greatest generation." So what does that make the rest of us? And they force younger workers to pay taxes to support their pensions, while telling those same workers to invest elsewhere because the system might not be able to provide them pensions.
Back to topic...

I worry that when the bulk of boomers retire here, their behavior might affect markets in ways we can't predict, and therefore can't prepare. Add that to QE123... and I think it's hard to plan for a stable ROI going forward.

Chad · Post by **Chad** » Sat Sep 15, 2012 11:00 pm

Agreement. Every now and then we are on the same side of an argument Jenny.