QE Encourages Stock Buy Backs, Discourages Hiring and Capital Investment
QE, designed to raise home prices, creating a wealth effect that would drive job growth, has made home prices unaffordable & created no job growth.
Check out the Smaulgld Gold Buying Guide
Check out the Smaulgld Silver Buying Guide
“You know, a lot of people say, this is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Janet Yellen, Chair of the Federal Reserve defending its quantitative easing (QE) program
Ms. Yellen, it doesn’t work that way. The proof is in the current economic data that shows while home and stock prices are rising, there is no corresponding increase in jobs created or homes sold. The labor participation and home ownership rates have dropped during the five long years of QE. Existing home sales are down year over year and if you are tempted to blame “lack of housing inventory” for the decrease in sales, consider new home sales, that would make up the supposed deficit in housing inventory, are at historic 30-40 year lows. (see chart below)
It doesn’t appear that it will get better as pending home sales and mortgage applications, indications of future home sales, are also down significantly year over year.
The Unintended Consequence of QE- Encourages Stock Buy Backs, Discourages Hiring and Stunts the Housing Market
The premise that people moving in an out of increasingly higher priced used homes is a sound way of growing an economy is faulty. The housing market should be reflective of the underlying strength of the economy, not the driver of it. Ms. Yellen’s statement regarding the supposed salubrious trickle down impact QE can have on the economy by creating a wealth effect among stock and home owners that in turn creates jobs is false.
How QE Hurts Job Growth
An unintended consequence of the artificially low interest rates engineered by QE is muted job growth. Corporations seek higher returns and react to artificially low rates by buying back their own shares (either with existing cash or with dollars borrowed at the artificially low rates) to reduce the inventory of shares available on the market and thereby increase their earnings per share. As earnings per share increase, a company’s stock price rises.
S&P Companies are the Largest Purchasers of S&P Shares
Artificially low interest rates encourage companies to use their cash to buy back their own shares to drive up their share prices, rather than to invest in their businesses. This explains why the economy is showing limited growth but the stock market is hitting record highs. According to CapitalIQ data, the single biggest buyer of stocks in the first quarter was not a mammoth hedge or pension fund, but the companies of the S&P 500 itself, which cumulatively repurchased a $160 billion of their own stock.
When interest rates are artificially low, business investment falls if the underlying economy can’t support a company’s growth plans. In such a circumstance, there is little incentive for companies to invest in capital equipment and labor to gain a competitive advantage over their competitors. Instead, companies pursue an advantage over their competitors in the form of higher stock prices that can be achieved through share buy backs.
When companies make the determination that they get a better and more immediate return on investment in the form of higher share prices from buying back their own shares than hiring new employees or making capital investments in their business, workers are not hired and additional productive capacity is not built. Buying back shares often offers a company the greatest return on investment.
EBEE: Earnings Before Everything Else- Generally Unacceptable Accounting Principle
Stock buy backs allow companies with no earnings (or those with “earnings” using social media accounting’s- Earnings Before Everything Else, stripping out salaries, stock options and rent, if necessary, to show earnings) but healthy cash hoards from their initial public offerings to continue to boost their stock prices by using that cash to buy back their own shares.
Initial Jobless Claims
To further reduce expenses, increase profits and their share prices, companies often lay off workers. Companies, however,can only lay off to a point. In the past year the pace of firing, as reflected by a reduction in the initial jobless claims data has slowed. Apologists for QE insist lower initial jobless claim data means that the job market is “improving” firming” or “strengthening”. It’s not. While the initial jobless claims may be the lowest since 2007, there has there has been no corresponding increase in hiring. Simply put, with a shrinking labor force, there are fewer workers left to fire.
How QE Hurts the Housing Market
Higher Home Prices = Less Affordable Homes
QE’s explicit goal to boost home prices is an objective that by definition makes homes less affordable. Higher prices mean lower sales. The Fed’s idea that inflation boosts growth (evidenced by their inflation “goal” of 2%) is misguided. When prices are lower, consumers can afford to buy homes and other goods and services and do so, when prices are higher, homes, goods and services become unaffordable and they curtail their purchases.
No Wage or Job Growth = Fewer Buyers to Boost Home Sales
For the real estate market to thrive, a large pool of potential buyers is needed. Potential buyers need to have jobs that pay enough to so they can afford to buy homes. Sales to first time home buyers are at historic lows (about 27%) reflecting that the youngest generation of potential home buyers, millennials, have been shut out of home ownership as a result of a lack of job opportunities, crushing student loan debt and of a Fed policy designed to boost home prices higher, making them unaffordable.
Cart Before the Horse Economics
Pushing home prices higher before the labor market improves puts the cart before the horse and puts potential home buyers in a perpetual race to catch up to rising home prices which they are destined to lose, especially if the Fed policies are designed to push home prices higher are working and have the unintended consequence of harming job growth.
The Solution: Move in the Fences – Lower Lending Standards
The Fed has yet to admit the folly of their QE ways. The Fed insists that printing $4 trillion out of thin air somehow helped the economy so much that they can now taper and end the program as economic growth, even without a boost from the housing market will accelerate later this year (now that the cold weather is behind us).
The Fed will leave “fixing” the housing market to the Federal Government. If home prices are too high as a result of QE and people can’t afford them, Fannie Mae and Freddie Mac have the solution – lower lending standards to allow people who can’t otherwise afford over priced used homes to qualify for mortgages so they can over pay for them.
New Home Sales
*the current U.S. population is approximately 317 million. The U.S. population was approximately 226 million in 1980 and 203 million in 1970.
Get Free Updates From Smaulgld.com
Hewlett Packard Fires 55,000 Employees, Buys Back Shares
The Dark Side of Artificial Interest Rates
The Housing Recovery that Never was, is Over
Who Will Buy the Houses to Sustain the Housing Recovery?
Real Estate’s Underwater Down Side Sticky Catch 22
Waiting For Household Formation
Student Loans are Holding Back the Real Estate Market
Millennials Not Part of the Club
The False Housing Recovery of 2013
The Dark Side of Rising Home Prices
Stocks Soars While the Housing Market Stumbles and GDP Declines
The Housing Inventory Shortage Myth
Why the Housing Recovery is a Farce Illustrated by Two Charts
Millennials Not Part of the Club Yet
The Fed is Conflicted on the Direction of the Housing Market
Please visit the Smaulgld Store for a larger selection of recommended Kindles, books, music, movies and other items.
Or you can support Smaulgld.com by making purchases from our affiliates or by making all your Amazon purchases through the search widget below:
*DISCLOSURE: Smaulgld provides the content on this site free of charge. If you purchase items though the links on this site, Smaulgld LLC. will be paid a commission. The prices charged are the same as they would be if you were to visit the sites directly. Please do your own research regarding the suitability of making purchases from the merchants featured on this site.
The content provided here is for informational purposes only. Making investment decisions based on information published by Smaulgld (SG), or any Internet site, is not a good idea. Accordingly, users agree to hold SG, its owner and affiliates, harmless for all information presented on the site. SG presents no warranties. SG is not responsible for any loss of data, financial loss, interruption in services, claims of libel, damages or loss from the use or inability to access SG, any linked content, or the reliance on any information on the site.
The information contained herein does not constitute legal, tax or investment advice and may be subject to correction, completion and amendment without notice. SG assumes no duty to make any such corrections or updates. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment. SG disclaims any and all liability relating to any investor reliance on the accuracy of the information contained herein or relating to any omissions or errors and as such disclaims any and all losses that may result.