April 23, 2013
Fed Is Firing Blanks With QE.
Hollywood is bringing back the man of steel, and one thing we can count on (other than a new body-sculpted suit), is that kryptonite will still be the only thing that zaps him of his power. While the comic geeks have Superman, investors have Helicopter Ben and the Federal Reserve that’s pumping $85 billion a month into the economy. But could it be the Fed has its own version of kryptonite that’s sapping its strength? Christopher Whalen of Carrington Investment Services seems to think so. The benefits of the Fed’s quantitative easing (QE) program are being offset by regulation promulgated from Washington, Whalen says, and therefore nullifying its stimulative ability. “When you look at all the constraints on banks in terms of lending, it’s just not being effective in terms of growing jobs, and the key thing is that even with say housing up 10% last year, there’s no credit growth,” Whalen notes. “In terms of a classical economic recovery, we’re not having that.” The Fed’s plan of reflating assets like home prices in order to stimulate the economy (and thus job growth) is admirable, but according to Whalen regulations like Basel III and Dodd-Frank are stifling lending. This is because reform legislation discourages banks from making all but the least risky mortgage loans.
In fact, Whalen notes that estimates for new loan originations in the U.S. mortgage market are in a precipitous decline; falling from $1.7 trillion in 2012 to $1.4 trillion in 2013, and perhaps below $1 trillion next year. Major home mortgage originators like JPMorgan Chase (JPM) and Wells Fargo (WFC) will likely take a hit from this decreased volume. To make matters worse, the Fed’s extended ultra low rate policy is hurting savers, as “QE is actually driving deflation now because we’ve gotten past the point where cheap funds are net-net helpful… because we’re constraining consumption,” Whalen says. “There was a time when QE in terms of the net effects early on was a benefit… but now we’re at the point where QE is really starting to hurt savers particularly, and I think that’s a drag on the economy.” Since regulation is here to stay, Whalen advocates that the Fed hike rates up a bit in the short term in order to get assets repriced from such low rates, which would help banks, investors and retirees who depend on interest income. It will take time to get housing, and thus the economy, back to normal, though. “We’ve put so much friction in the system, to expect a classical recovery is almost unreasonable,” Whalen concludes.
New home sales rise, housing recovery still on track.
Sales of new single-family homes rose in March, indicating the housing market recovery remains on track. The Commerce Department said on Tuesday sales increased 1.5 percent to a seasonally adjusted annual rate of 417,000 units. Last month’s rise followed a 7.6 percent drop in February. Economists polled by Reuters had expected sales to rise to 420,000-unit rate last month. Compared with March 2012, sales were up 18.5 percent, indicating the strength in the housing market that has helped boost the economy was on course. Sales are being set back by a lack of supply of homes on the market in some major parts of the country. While the inventory of new homes on the market rose 2.0 percent to 153,000 units, it was not far from record lows. At March’s sales pace it would take 4.4 months to clear the houses on the market, the same pace in February. A supply of six months is normally considered as a healthy balance between supply and demand. The low months’ supply should push up new home prices. The median sales price for a new home was $247,000, up 3.0 percent from a year ago. Sales last month in the Northeast surged 20.6 percent and rose 19.4 percent in the South. Those gains were partially offset by declines in the West and Midwest.
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