Ben Bernanke and the Federal Reserve are ready to stimulate the economy at any cost. The Fed will inject $40 billion per month in mortgage-backed securities purchases. This policy is good for some, bad for many.
Let’s keep track of the score.
11 Winners and Losers from QE3
1. Winner: Banks – Banks are inflation neutral. Banks can afford to lend at less than the current inflation rate and still make money. Why? The money they lend is not their own – it’s money that they borrower from their account holders at a rate below inflation, anyway. When you borrow at rates below inflation, you can afford to lend at rates less than inflation and still make a profit.
2. Loser: Savers – Savers and fixed-income investors are the biggest losers in the Fed’s decision to interject more liquidity in the markets. Grandma and grandpa cannot compete with the Federal Reserve, which can create more money just by adding zeros to a computer balance to purchase mortgage-backed securities. Grandma might need 2% per year to afford her bingo binges, but the Fed has no profit motive. Unlike banks, savers have to worry about inflation.
3. Winner: Home Owners – The Fed’s Treasury buying pushed down rates in treasuries, which brought a smaller reduction in mortgage rates. Now that the Fed is pushing money directly into the mortgage market, mortgage rates will go lower, faster. Conventional borrowers are the biggest winners, since the Fed is buying agency-backed mortgage backed securities.
4. Loser: Renters – Lower rates mean higher home prices when investors bid up the price of homes to bid down the spread between the cost of a home and the rental income from any given property. Now is the time to buy if you’re still renting.
5. Winner: Obama – Obama proudly declared that the Fed was holding down the cost of college by reducing rates in a recent speech. The politically unaware will happily assign credit to Obama for lower financing costs of all kinds.
6. Loser: The Deficit – Where’s the incentive to tackle fiscal concerns when you can borrow at near-zero? From 2001 to 2010, the US debt soared 133%. The amount paid in interest to service the national debt rose only 15.1% in that period. Washington D.C. has yet to feel the pain of incredible deficit spending.
7. Winner: Big Business – When the Fed drives down rates in mortgage backed securities, investors who want higher yields will have to go elsewhere. Corporate bonds will likely become the next stop for investors who have to move up the risk chain to get an adequate yield. Capital displaced by the Fed in the mortgage-backed securities market has to go somewhere.
8. Loser: Salaried workers – People who work on salary or for an hourly wage have the most to lose in an inflationary environment. In periods where inflation is high, and unemployment is even higher, there is no reason for employers to raise wages to match the rate of inflation. This is a good time to be working for commissions! Higher prices and more sales make for a bigger paycheck, even if your earnings merely keep pace with inflation. (See why your salary will never rise again.)
9. Winner: Commodity producers – I nearly had a heart attack when I saw my portfolio after the Fed’s decision. Investors were buying everything, but energy stocks were the best performers. Since oil and gas are commodities, they operate on basic supply and demand. A greater supply of dollars chasing the same amount of energy production brings higher energy prices. (See state by state gas prices.)
10. Loser: The Poor – The basic necessities are only going to get more expensive. Darwin tackled the concept of a real inflation rate in a post about the Everyday Price Index. While the general rate of inflation is quite low, the inflation rate in basic necessities is exceptionally high. Those who spend the most of their income on food, energy, transportation, and a place to live will see the biggest losses in real income.
11. Winner: Debtors – There has never been a better time to borrow money. Given that rates are so low, anyone with outstanding debt of any type should look to refinance. Rates have plummeted so fast in the last two years that it now makes sense to refinance even smaller consumer debts like car and personal loans. A friend of mine shaved 2% off her car loan and received $200 back just for signing the dotted line! That’s not too shabby for the whole hour she spent on the phone and at the bank. No cost refinances are the new normal.
For a full synopsis on actionable investments as a result of QE3, check out this article on the QE3 ETF Beneficiaries.
Are you a winner or loser from QE3?
{ 4 comments… read them below or add one }
Winner, without question. Though completely disagree with the manipulation of the market.
Winner here, too, and I agree 100% on policy. Luckily, people who are cognizant of what’s going on should be able to position themselves to be a winner from any quantitative easing.
How long do you think this can go on, JT? Our mortgage rates are being held low, but the housing market up here is much hotter than down south. It’s slowly starting to cool off but prices are just nuts in some cities.
If I knew, I’d be a billionaire! It’s hard to say…there seems to be no limit to how long Bernanke is willing to throw money into the financial markets.
If I were Canadian, I would be very concerned. Your housing market’s fundamentals – mostly the price to rents ratio – looks a heck of a lot like the ratio in the US before the housing collapse. To say Canadian housing is overheated is an understatement, for sure.
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