By John Nyaradi
Since the financial crisis struck in 2008, Dr. Ben Bernanke and the Federal Reserve have made several epic moves to crank up its "liquidity pump" with monetary stimulus measures.
- In November 2008, the Fed initiated the first quantitative easing program by purchasing $600 billion in mortgage-backed securities over a period extending to March 31, 2010. Before the financial crisis, the Fed held nearly $800 billion of Treasury securities. By March, 2009, the Fed's balance sheet had reached a total of $1.75 trillion.
- On Nov. 12, 2010, the Fed commenced its second quantitative easing program (QE2), which involved the purchase of longer-term securities at the rate of $75 billion per month. By the time QE2 ended in June 2011, another $600 billion had been spent.
- Next came Operation Twist, which involved the purchase of bonds with maturities ranging from six years to 30 years, while replacing them with shorter-term bonds with maturities of less than three years. Operation Twist originally involved the purchase of $400 billion in bonds. In June 2012, the program was extended through the end of the year, to include the purchase of an additional $267 billion in Treasury bonds.
- On Sept. 13, 2012, Ben Bernanke announced the third round of quantitative easing (QE3), which involves the monthly purchase of $40 billion in agency mortgage-backed securities until the outlook for the labor market improves and is now commonly known as "QE To Infinity."
So what has Bernanke and his Federal Reserve gotten for this unprecedented effort?
From March 2009, the stock market went on an historic rally with the Dow Jones Industrial Average accelerating from a low of 6547 to today's 13,076, a gain of 98.9%. Corporate profits improved dramatically and unemployment has declined from 9.6% to 7.8%. The nation's GDP has gone from a low of -8.9% to approximately +2.0%.
These are all significant achievements. However, it could be easily argued that we're nowhere near out of the woods yet and that, indeed, Bernanke has failed.
Consider the following:
- Since 2010, the U.S. dollar (UUP) has declined approximately 9%.
- Current earnings reports from U.S. companies are nothing short of dismal, with 60% reporting revenue shortfalls and declining earnings, including everyone's favorite Apple and bellwethers Amazon, Federal Express, Microsoft, McDonald's, and Google.
- The world economy is rapidly decelerating toward a double-dip recession as Spain, Greece, and Italy wrestle with depression like economic environments, and with a report on Oct. 3 from Markit Economics that its eurozone composite PMI had fallen to a four-month low of 46.1. Readings below 50 indicate contraction, and with back-to-back negative quarterly GDPs from several major European countries, the continent is well on its way to a second, significant regional recession.
- After the announcement of QE3 on Sept. 12, the S&P 500 peaked at 1465 on Sept. 14 and has since declined approximately 3.5%, leading many market participants to wonder if quantitative easing has lost its mojo as a tool to stimulate the U.S. stock market and economy. The Nasdaq 100 has declined even further, down some 7.5% from its recent high reached on Sept. 19.
And now we come to the biggest near-term challenge of all, the so-called "fiscal cliff," scheduled for January. If not averted, it will trigger an immediate recession in the United States with its automatic spending reductions.
This event will be particularly noteworthy since the champions of "The Great Recession," Bernanke and his Federal Reserve, will be largely powerless to offset the evil effects of the fiscal cliff. In fact, Chairman Bernanke has admitted that the Fed would be unable to offset the negative effects of a fall off the fiscal cliff. So here we are, nearly five years into the greatest financial crisis since The Great Depression and many analysts now suggest that we're not much better off than we were five years and a few hundred billion dollars ago.
Unemployment in the United States remains at unacceptable levels, corporate profits are slowing, and the global economy is heading for recession, while Congress remains completely dysfunctional and unable to agree on anything. Has Bernanke failed? Many people would say "yes," while others point to how much worse things would have been if he hadn't acted as he did.
This is a subject of great debate that will continue for years. Needless to say, we live in historic times and, in my opinion, the only thing that really matters is how we survive and prosper through the upcoming years. Great fortunes will be made and much money will be lost over the course of the next months and years as this momentous episode of U.S. financial history plays out.
One thing is certain, and that is that Bernanke and his Federal Reserve will move heaven and earth to avoid deflation and depression. Whether or not they will be successful remains to be seen, however. As we rapidly come to the end of 2012, I'm reminded of famed stock market investor Jesse Livermore who said, "There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." The only question that really matters is, which side of the trade will you be on in 2013?