Fed Launches QE2: How Does That Benefit Me?

The QE2 leaving Southhampton

The QE2 leaving Southampton

Today the Federal Reserve launched the highly anticipated QE2, announcing that it will buy $600 million of Treasuries in 2011 ($75 million per month). It will also continue to reinvest payments on its securities holdings which could bring the total capital injection closer to $1 trillion dollars.

I’m still waiting to see any evidence of  “Change You Can Believe In” and for the $8.5 trillion bailout to kick in and create jobs. But since Bernanke seems that it hasn’t been working too well, we’re going to do exactly the same thing that got us in to this mess – keep interest rates low and turn on the liquidity spigots!

One point of interest is these policies seem to benefit banks the most. Here’s an excerpt from an article on Yahoo! News:

Meanwhile, market watchers noted the Fed’s plan is to focus its QE2 purchasing power on the middle of the Treasury curve, i.e. securities from 2.5 years to 10 years. As a result, prices of shorter-term bonds rose while the price of the 30-year bond tumbled, sending its yield sharply higher.

So the real result of the Fed’s action today is a steepening of the yield curve, which most benefits (wait for it)…the banks. The ability to borrow from the Fed at effectively zero and then reinvest in “risk-free” Treasury securities at a higher yield is a huge reason why bank profits rebounded so quickly from the depths of the 2008-09 crisis.

Despite loads of evidence to the contrary (and very little lending) the Fed is effectively doubling down on its bet that boosting the banks’ balance sheets is the best way to revive the economy.

I can’t believe that this is the best policy to revive the economy. However, it definitely makes sense to align yourself with the Federal Reserve’s determined course of action. Seems like there are 2 things you should do:

  1. If you’re currently unemployed, find a job at a bank. Most banks are hiring like crazy. Bank of America has thousands of job postings (I’m not making this up)
  2. If you’re looking to invest, look for companies that benefit by borrowing at zero interest and reinvesting in risk-free Treasury or Treasury-like products.

There are several companies that fall in this category. Not only do they benefit from the current scenario, but they also pay high dividends and enjoy REIT status (meaning there’s no double taxation of profits) without actually investing directly in real estate.

Any guesses? I’ll talk about them in my next post.

Finding A Job

Regular readers know that I’m a full-time MBA student. I haven’t had much time to post mainly because I was spending a lot of time looking for a summer job. With the economy being as bad as it is, it’s been quite hard to get a paid job this summer. Unpaid internships are a dime a dozen and I was able to procure a few of those, which I turned down.  Eventually, I was able to find three paid gigs. One was in the IT department of a large cruise line company which didn’t really excite me.  Another was an online marketing analytics job that was very tempting. However, I turned that down in order to research distressed commercial real estate at Marcus & Millichap. Finding any sort of paid real estate job is tough in this environment and I figured that spending 3 months over the summer was a good way to gain some experience in the field of commercial real estate.

But landing these jobs was very tough. It probably would have been easier if I had looked for product management jobs, since i have a programming background, but I really wanted to do something different over the summer. If I’m spending all this time and money getting an MBA, I might as well do something that doesn’t just slot me as another techie.  My first preference would have been a job in investment management but despite having several interviews that didn’t pan out.  I think if I had networked a lot more, that could’ve become a reality but that’s probably true of any field. If you network hard enough, you’re bound to land a job sooner or later.

One thing all students should do is contact alumni in their fields of interest and offer to buy them coffee to learn about the industry. It’s much easier to do as a student otherwise you’re just some weird random dude who wants to meet them! You never know who will be able to help you get a job. And it probably won’t be the friends you hang out with all the time. You’re all part of the same network and if there were an openings, you would have known about them already. So go out and expand your network!

Check out this funny video for more job finding tips.

The Colbert Report Mon – Thurs 11:30pm / 10:30c
Stephen’s Sound Advice – Summer Jobs
Colbert Report Full Episodes Political Humor Stephen Colbert in Iraq

Manufacturing Jobs Coming Back To The US

I read a lot of financial news and newsletters on a regular basis. One of the paid newsletters I subscribe to is Capital & Crises by Chris Mayer which discusses safe, non-speculative stock market investments. Today I got an email quoting Mr. Mayer which was pretty interesting. It was about the return of manufacturing jobs to the US.

“The weak U.S. dollar makes U.S. assets look cheap to foreign buyers,” comments our managing editor Chris Mayer. “And they are buying.”

In 2007, foreign purchases of U.S. assets topped $400 billion. That was a 93% increase over the year before. The top foreign purchasers were Canadian, British and German, with their loonies, pounds and euros. But the Middle East and Asia — most especially China — are quickly catching up.

“It’s interesting what they are buying, too,” Mayer writes. “Hardwood trees in Pennsylvania, for example. In fact, there are six Chinese companies in the process of closing deals in that state. The Chinese are also looking to set up manufacturing facilities here. The weak U.S. economy means that some pockets of the country have high unemployment — lots of skilled workers without their old manufacturing jobs. Enter the Chinese.“In South Carolina, the unemployment rate is 6.6% statewide. In some areas, it’s more like 10-15%. Chinese investment has come in to soak up some of that excess. Haier, a Chinese appliance maker, has a refrigerator plant in South Carolina. There is also a Chinese-owned chemical plant, a printing company and a general contractor.

“Not only can Chinese manufacturers find good workers, but land is cheap. Also, electricity is about a quarter of the cost in China. Plus, in South Carolina, the Chinese are closer to their customers — mostly Americans.

“It’s an odd mix of realities, isn’t it? First, America’s manufacturing jobs go to China. Now the Chinese are bringing them back. It’s not that simple, of course. But down on the ground, in small ways, there is this interesting shuffle going on. Even 10 years ago, I think such investments by Chinese businesses would have been very unusual. Over the next 10 years, I think such investments will become quite common.”

A few years ago, I realized that if the Federal Reserve weakened the dollar enough manufacturing jobs would start coming back. Accordingly, I bought a couple of rentals in the mid-west while they were still cheap. I paid $90k for a 5 year old, 1600 sq ft house, which looked pretty cheap to me since I was living in a $350K, 920 sq ft condo in San Diego. This is the first sign of manufacturing jobs coming back to the US. Hopefully the trend will continue. Maybe this is the only silver lining of the devaluation of the US Dollar.

You might want to also check out Mr. Mayer’s new book, Invest Like A DealMaker. It’s definitely something I’ll pick up when I get back to the US.