Is the third round of quantitative easing going to leave us long before we though it might?
On Wednesday at 9 a.m., the director of the Federal Reserve moved the markets after indicating that there was little chance they would stop the flow of monthly contributions to the banking system in the amount of $85 billion. Hey, that's what has stoked the coals of the markets and has lifted it up.
There are many factors involved in the result of the lifting, which I will discuss later. However, the markets rose up in joy (about 150 points on the Dow Jones), not unlike a standing ovation at the theater. There was joy in Marketville! Then, later in the day, around 1:15 p.m., the announcement of the minutes from last month's Federal Reserve meeting when the revelation came out that there may be some tapering off of the QE3, the market dropped like a hot potato.
The difference was simply that the implication was there would be a discontinuation of the QE, even as early as this coming June, which is just around the corner. This was in complete contradiction to the words of the Fed leader, Ben Bernanke. The markets dropped severely on the spot and floundered for the rest of the day until closing. Then, it went on in the after markets as well. What happens from here?
I suspect the markets will take a breather, as I have mentioned in recent articles. We might expect a correction of 5 to 15 percent. Also, the adage about selling in May could have had an effect. The question though is what difference does it make to the markets that the Fed might - and, of course, it eventually will - stop the generous donations to the banks?
First, the banks were provided cheap money, at 0 to 0.25 percent. Why else can they loan out money at such low rates? As long as they have 2 or more percentage points, they can make money for a long time. No one in their right mind would want to pay off early on a loan like that. The idea was to get things going in the economy, period. Has it worked? Yes and no.
Yes, many folks have bought cars, houses and furniture, rejuvenated their homes, corporations have borrowed, but the economy slowly is lifting out of the worst recession since the '30s. Also, very much of the work has been moved out of the country and unemployment is still rampant. I was in Detroit last week to visit the Ford plant as well as the museum. Fords are selling like the dickens, but the city is still in extreme distress. There used to be many plants making cars, and now there is not.
We are not out of this mess yet and I dare say it will be sometime before we are. However, unless we can continue growing, we will put off the return of the USA we knew for many years. I have not lost my optimism, but what happened Wednesday slowed it a bit. Remember, if stocks go down, they get cheaper to buy.
Wednesday, I talked with one of the noted real estate brokers in the area. I asked her how home sales were moving, whether or not we would return anywhere near the numbers we were seeing just five or six years ago. Here's just a few ideas: empty lots are selling well; houses up to $650,000 are moving (the higher the prices, the slower the movement); values are increasing from the lows, 20 to 30 percent; still a lack of demand (most likely due to employment and fear); appraisals need to be looked at more closely.
As you have likely read, housing across the nation has improved but still is slow. Of course, we don't want it to go bananas on us. The lots being sold are not spec houses either. Higher-end lots are selling well and look favorable.