JJ Kinahan talks about where he thinks interest rates are headed and whether investors can expect a fourth round of quantitative easing from the Fed.
I'm here talking to JJ Kinahan about interest rates, the interest rate cycle. We know Ben Bernanke's going to be around now for maybe another few years. What's the interest rate picture in your mind and where do you think we're going?
I find it very interesting. We had a press conference earlier this week, and as we speak it's mid-November right now, and for the first time we actually heard a media hint of a QE4. Which I found very, very interesting.
Again, QE3 took so long to materialize. I just don't know if you'll get the support for a QE4, but it's interesting it was mentioned, which perhaps dampens anybody who is hoping for higher interest rates in the short term.
As we speak right now, the ten-year is trading between 1.5% and 1.6% on the yield, and it just seems that as we look what's happened over the last year or so, yield between 1.5% and 2% seems to be the range we're going got be in as news breaks. I really don't believe that for the early part of 2013, there's any reason to believe that it's going to be much different.
Now, as things go on-as we have hopefully a settlement of the fiscal cliff, as we have new tax policies-there could be pressure to:
- Reinstate a QE4;
- Completely back off it and let the economy kind of play itself out, as many of these companies know what the rules are and can start to expand.
I really believe that the Fed is going to be on top of it, but for right now, to do anything but status quo I believe would be a mistake.
We used to see the market respond really positively to quantitative easing. It's like Rocky movies now. I mean, does QE4 matter as much as QE1 or QE2 did?
Well, I don't think they're as powerful as Apollo Creed, but anyway, it's diminishing returns, let's be honest. Just like anything like that.
But the problem the Fed has is there just aren't many levers to push anymore. I think Bernanke's true hope is he never has to go to a QE4, because exactly we're going to get Rocky 75 soon. He'll be in a nursing home fighting somebody. He doesn't want that, because at that point it loses all meaning and all help.
It takes-let's face it, it's going to take us until the spring to really see the affects of QE3 anyway, if you go on what's happened on the last two. There's the initial euphoria, but until the money really gets through the system, it takes some time.
Yeah, that was my next question. Has the money from QE2 and QE3, has that really trickled down into the economy?
I would say QE2 has; I would say QE3, certainly not.
So we're still waiting for the final effects of QE3?
Right. So I think QE4...let's put it this way. It's great at a press conference for somebody to ask about it. It makes them look really good. But in reality, people in the financial industry are like let's hold off, let's see.
You've got to let things play out. As our country, we're very impatient people; myself certainly included. But you have to let these things play out. You have to let the cycle go before you can actually do something else.
For someone like me that's watching these press conferences and when I see Ben Bernanke on the screen there and I see an announcement of QE4, who would I expect to be the big winners on a quantitative easing round four?
Well, in the past, the financial sector has been a big winner. They have been, I would say, almost a primary winner in what we have seen before.
The housing industry has been a really big winner also. If you look at what those stocks have done over the last year and a half, they've had a beautiful run, and part of it is because what it's allowed the banks to do and the mortgage companies to do is to get rid of some of the inventory. So homebuilders can actually build some new homes that people are interested in.
So some of those banks with a lot of exposure to the housing market, like Wells Fargo (WFC), comes to mind. We could look for some of those to perhaps be some of the big winners if that's announced?
Absolutely. And like I say, I think from them you have to watch housing-the homebuilders, and from that you watch the Home Depots (HD) and the Lowe's (LOW) of the world, which also pick up very nicely when housing is good.