QE2 as the World’s Largest Shelf Offering
- Joshua M Brown
- November 18th, 2010
"The only real defense is active defense."
- Mao Zedong
There's a newish meme making its way around the blogosphere and The Street concerning the actual purpose of QE2 and boy, is it an ominous one. I say newish because the Legion of Doom has long suspected the theory I'm about to lay out, it's only now getting a bit more play in mainstream venues.
It goes like this...
When a company senses an upcoming opportunity or an open stretch in the foreseeable future in which a large capital raise may be possible or advantageous, it files what's known as a Shelf Offering. This can be a bond offering, a secondary stock offering or some combination thereof (a mixed shelf). The company now has its filing details out of the way so that upon arriving at the perfect moment (after a spate of good news drives up the share price, let's say) it can issue shares or debt at the drop of a hat.
This is what smart management does - the shelf allows for speed, opportunism and flexibility.
At face value, Bernanke and the rest of the Easy Street Irregulars would have us believe that QE2 is about creating juuuuussssst enough inflation for at least one person in this country to want to hire one other person. But Bernanke is not stupid, so in light of all the evidence that monetary policy cannot move the jobs needle, it's getting harder to believe his stated intent.
And because his motives are now suspect, even the non-nihilists are beginning to talk about the "real reason" for his $600 billion QE2 shelf offering. They say that the Fed sees housing rolling over, the banks taking another round of body blows and the next Lehman-like meltdown somewhere around the bend.
They conclude that the Fed is not truly expecting jobs or economic growth to emerge from QE2. Rather, it is the reserve buying power to defend us that the Fed truly seeks.
The always circumspect Pragmatic Captitalist lays this case out very well and grudgingly commends the Fed for attempting to get out in front of something for a change. PragCap connects the dots between a call for new bank stress tests and the Fed's stated easing policy to arrive at this theory.
If you subscribe to this line of thinking, which many now do, then you must conclude that the Fed is being clever, even responsible. Some of the market watchers I respect most now believe that QE2 is the shelf offering - the defense that will be available should the whole housing-municipal debt-unemployment wreck threaten the recovery this winter.
I am not quite there yet myself. I am still concerned with the unintended consequences of Endless Zero - namely in food costs. And although China's freakout this week over vegetable pricing justifies my concerns, I admit that food is perhaps the only area in which inflation is even hinted at right now. Yesterday's CPI was as benign as you get.
So is QE2 really about growth or just guarding against a double dip? I wonder what the conservatives who penned that anti-QE2 op-ed on Monday would think about Ben's planning a shelf in case of emergency. I'd venture to guess that a couple of them might even defect, especially if the data keeps coming in like this week's housing starts number did.
Food for thought.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.