Hedge fund manager David Einhorn has been an outspoken critic of "QE-infinity," as some call it — the seemingly unending Fed policy of buying $85 billion worth of bonds every month.
He even wrote a Huffington Post column about it last year called 'The Fed's Jelly Donut Policy" where he equated the Fed's policy with Homer Simpson's addiction to jelly donuts.
So in his latest investor letter, when commenting on the Fed's decision not to taper quantitative easing, Einhorn didn't sound happy, but did write that his hedge fund had a little party to mark the occasion.
No one is sure what the Fed is focused on. After spending several months bracing the market for fewer QE donuts, the Fed decided that it was premature to taper. Even a token reduction (from a baker’s dozen to a dozen?) was ruled out despite the fact that the economic trajectory has not materially changed. We responded the next morning with our own stimulus by ordering jelly donuts for the entire office.
In his Huffington Post column, Einhorn argued that " Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money..." so we hope no one at Greenlight over-ate.
However, the idea we're not sure what the Fed is focused on, seems a little tired at this point. The rumors that QE was ending alone were enough to set the market into a tizzy this summer. And then suddenly, everything that indicated that the recovery was coming started to backslide.
Everything that Bernanke has said time and time again that he's focusing on — like employment and the housing recovery.
Just go back to September's meeting when Bernanke made this point himself.
Business Insider's Matt Boesler wrote " Bernanke Clearly Felt The Need To Correct A Big Mistake" after that announcement — that the chairman realized his June statements led those who read Central Bank tea leaves (necessary or not) to speculate that the taper was coming.
But this should all be a lesson in expectation versus reality.
In June, there was a lot more optimism about the economy all-around. Interest rates were rising on that sentiment, and even the Fed revised its expectations up. So here's what Bernanke said about QE then:
"Yes, rates have come up some. That's in part due to more optimism – I think – about the economy. It's in part due to perceptions of the Federal Reserve. The forecasts that our participants submitted for this meeting, of course, were done in the last few days, so they were done with full knowledge of what happened to financial conditions. Rates have tightened some, but other factors have been more positive – increasing house prices, for example."
The problem with those expectations, though, is that they didn't play out in reality. The housing recovery started to lose steam and the U.S. consumer started to falter and lose confidence. Conditions moved away from where Bernanke said they should be to initiate the taper.
Interest rates were already rising slightly at the time (starting in May) and what little they rose impacted the economy negatively.
Just take a look at bank earnings. Across the board, JP Morgan, Bank of America, Wells Fargo, and Citigroup reported declines in their mortgage businesses as fewer Americans took out mortgages or refinanced.
And across the board, those declines significantly hurt each bank's bottom line.
Einhorn wrote last year that Bernanke was "wondering why it [QE] isn't giving us energy or making us feel better." But that doesn't seem to be the case though either. Over and over again pundits, politicians, and Bernanke himself have said that the Fed's powers are limited. The Fed needs help from policy (and its makers) to bring the American economy around.
Until that happens, Bernanke has said that he's committed to doing whatever (little) he can to enable a recovery by continuing QE and not raising interest rates before we're ready.
Here's what Bernanke said about that back in 2012:
I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. ...Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues...
So that's Bernanke's focus — helping the economy along until it's ready and " avoid(ing) a tightening until the economy is growing the way we want it to be" as he said during the last Fed announcement.
If Einhorn wants to end QE, he should go to Washington and ask the politicians down there to help the Fed out with some decent policy.
I know, funny.
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