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The Truth About the Fed and QE

Written by Briton Ryle
Posted September 2, 2020

I don't mind telling you, I am desperate for some normalcy. I've done my best to establish some consistent routines working from home. But you know what they say about consistency and little minds...

So, yes, the coronavirus has been humbling. My attempts at establishing consistent routines over the last five months have been consistently beset by television, naps, and red wine during the work day. Maybe I shouldn't say all that out loud... pretty sure my boss reads these articles.

Anyway... both my kids are now attending college classes. My son is starting his freshman year at University of Maryland 100% online, semi-confined to his dorm room. Not ideal. And I didn't realize it until we were moving stuff in last week, but his dorm is like a block from the football stadium. I blurted out, "Holy cow, Saturday's would have been amazing! Can you imagine 70,000 people walking this area?" without thinking.

Of course he can imagine it. But he won't live it, and that just drives the "everything sucks" point deeper, like a splinter under your thumbnail.

My mom turns 82 in a couple weeks. My stepdad will be 91(!) in January. And we lost our beach week this year. You just don't get this time back. 

In June, I did manage a road trip with my daughter to visit my mom in Georgia. She's got a big open house that looks out over a salt marsh where the Saint Marys river hits the ocean between Cumberland Island and Amelia Island. There were no hugs. 

And last week, my son and I lit out to Charleston, South Carolina for a few days of sand and salt water at Folly Beach. I didn't get to see my aunt and uncle who live 20 minutes away on Mount Pleasant, but we did have a nice beach happy hour and dinner with my cousin, his wife, and daughter. It is amazing how good I feel after that little jaunt.

And I'm determined to keep the good feelings going, so I've been making the 20-minute drive into Baltimore's Mount Vernon neighborhood where I can sit in my office at Angel HQ for a few hours every day. I've always been aware that it's the little things that make life sweet. I feel damned lucky to have an office to sit in.

You Mad, Bro? Or Grateful?

I understand that a lot of people are mad right now. I've found that if you wanna be mad, you can always find plenty of reasons to be so. No doubt this coronavirus has everybody's hackles up. Plenty of people are mad at racial injustice right now. And plenty of people are mad at the NBA for taking up the cause. I don't know. I'm a human being. As such, I understand the fear, pain, and anger when a man has his neck kneeled on till he dies or is shot seven times in the back. 

As for the NBA, I don't really have a dog in that fight. They can say what they want — this is America. I'm not judging anybody for speaking their mind. Though I admit I kind of enjoy watching people get all bent outta shape when a fellow American speaks his or her mind about their experience. Like it's news that we don't all walk the same path.

I talked a little about the dynamics of risk and how it affects investing on Monday. Today, I'm gonna touch on anger. 

It might seem kinda weird that people get angry about the stock market; but they do. Just get on Twitter and praise Elon Musk and Tesla. Or go on Twitter and bash Elon Musk and Tesla. Either way, people will come out of the word work to tell you you're wrong, stupid, and probably a communist. (Funny thing, there was a time when calling someone a communist was patently absurd. Today, maybe not so much.) 

But if you really wanna get people ticked off, start telling people what a great job the Fed is doing. But be careful; somebody might try to sucker punch you.

It's a funny thing. Because if ever there was a fight in which most of us don't have a dog, it's monetary policy.

In fact, if you've bought a house or a car in the last 12 years, you've benefited from the Fed's low-rate stance. 

History Rhymes

If you're mad at the Fed for buying Treasury bonds to keep rates low, also known as quantitative easing, lemme ask you: Are you invested? And I don't mean in gold, either. I'm talking about stocks. You know, corporate equity that increases as populations and incomes grow, new products are introduced, efficiencies increase, and costs are cut. 

I find there's a pretty high correlation between Fed hate and gold love. Me, I don't have a dog in the Fed-gold fight. I like stocks to grow my money for the aforementioned reasons. Growth, efficiency — these are things I understand. Gold came to our planet via asteroids, and its value is determined by inflation expectations. I won't pretend I understand that. 

Now, if you wanna bash the Fed for growing its balance sheet by ~30% so far this year, I'll allow it. If you wanna point out that the Fed now owns 30% of the agency backed-mortgage bonds, again, the judges say that's fair game. Editor's note: By "agency" mortgages, we mean loans originated by Fannie Mae and Freddie Mac. 

But before you go down that road, did you know that much of America's WWII spending was funded by quantitative easing? Between 1941 and 1945, the Fed's balance sheet grew by — hold on to your hat — 978%!

Going into the war, the Fed's balance sheet was $2.25 billion. Four years later, it stood at $24.26 billion.  

Oh yeah, QE is not a new concept. Now, before you try and say, "Yeah, but times were different, the current Fed is way more out of touch," well, inflation was hitting 17% back then, and rates were still pegged at 2.25%.

The only real legitimate beef with the Fed is that its policies bail out investors first and thereby increases wealth inequality. It's true. I'll tell you right now, the solution to the wealth gap is not punitive wealth taxes and raising capital gains taxes. That's an angry response. The way to close the wealth gap is to encourage lower income households to invest. Taking more of their profit does not do that.

Tax incentives (or credits) and lower capital gains taxes are the answer. 

Now, one last thing about risk. I'm not telling you that there's no risk in the stock market and you should dive right in. The fact is: There is always risk in the markets. People can start selling anytime, and they usually don't ring a bell at the top. My point is simply that anger will have you missing opportunities. It's pretty simple, and I guess I coulda just said that at the start...

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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