Rosenberg: 5 Signs of QE’s Diminishing Returns

I often talk about how QE has had diminishing returns from QE1 to whatever we’re calling the latest phase of the program.  That is, with asset prices selling substantially below par, the Fed was able to come in and instill confidence in investors that mortgage backed securities weren’t worth 30 cents on the dollar.  This was essentially a huge capital injection into the banking sector and had a colossal impact on the economy.  But as asset prices have surged (and even become overvalued in some cases) the impact of QE has become less obvious.

In his latest note David Rosenberg highlights 5 reasons why he believes QE has had diminishing returns and only benefited a select portion of the US economy:

“1.  Is it still the worst economic recovery ever.

2.  The Fed eased and eased and eased, but bank credit growth has been anemic to say the least – a critical element in this expansion and the lack of credit growth has caused the economy’s trajectory to have changed materially from what we have experienced in the past six decades.

3.  Everyone seems worried about the impact on higher mortgage rates on the housing market and yet this recovery in residential real estate has had little to do with Fed policy or what bond yields are doing.  Affordability at is most lucrative levels this cycle did little to entice first time buyers, who still command a recession-like 30% shares of sales activity (the first time buyer shares of resale activity fell to 28% last month from 34% a year ago and 36% two years ago).  This has been and remains a housing market dominated by all-cash institutional investor deals aimed at buying-for-rent.

4.  The “wealth effect” only works if the positive shock is deemed to be permanent as opposed to transitory.  I am amazed that this basic premise of permanency and the impact on expectations managed to escape the Fed escape-velocity models.  The newly found net worth must be seen as more than temporary, but who doesn’t know that all these capital gains, whether through equities or housing, weren’t artificially stimulated by Fed policy as opposed to some major positive shock from underlying private sector economic forces?

5.  What the Fed managed to do this cycle was help the rich get richer with no major positive multiplier impact on the real economy.  Sorry, but Peoria Illinois, probably does not know how to locate the corner of Broad and Wall.  So the Fed, by virtue of its excursions into the private marketplace for capital, manages to engineer the mother of all Potemkin rallies, sending the S&P 500 up 140% from the 2007 trough to attain record highs by May of this year (even with the June swoon, the SP 500 still managed to eke out a 2.4% advance in the second quarter and is up 12.6% for the year in the best first-half performance since 1998 when GDP growth was 5.5% … for this the Fed should just continue with the status quo?).  It took but six years to make a new high in the stock market.  In the Great Depression, it took 25 years.  Bravo!”

Source: Gluskin Sheff


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

More Posts - Website

Follow Me:

  • PeterP

    Rosenberg is a stopped clock. Wake me up when he’s bullish so I can sell my stocks.

  • Stephen

    In this instance he probably touched on all the relevant points. Ignore the “stopped clock” if you so wish, but personally I am less interested in who is saying it than I am in what are the arguments they making. Those arguments make a lot of sense from a macro economic perspective. Time the market from them, no. Not get caught out over committed to growth and risk ,yes.

  • Gary-uk

    QE is merely the Fed buying the USTs no one else wants.
    And now the rest of the world is actually selling out if the USTs they already own.
    The slippery slope lies ahead.

  • Geoff

    No one else wants USTs?? I want them.

  • InvestorX

    Look Rosie is right, but these insights cannot be used as a timing tool.

    Think about socialism – people knew that something was foul and everything was a Potemkin village, but the 5-year plans got always overfulfilled, dissidents silenced, and everything went smoothly on…until the house of cards collapsed. The Fed has “engineered” such a Potemkin recovery. When it is recognized is hard to tell. Who predicted the collapse of the Soviet Union in 1989? Nobody.

  • Widgetmaker

    What was the Fed to do? Raise rates? Keep them unchanged? Sit on its hands and do nothing? What the economy needed/needs was an injection of spending from the government to replace the demand that collapsed along with the housing bubble. But that is outside the province of the Fed, who only controls the money supply. Congress needed to act and they did so woefully.

    The Fed had to do all it could do to counteract the slump. They couldn’t lower short term rates any more so they pursued unconventional policies – purchasing long term bonds. There was also the threat of deflation, which would be even more devastating to the recovery. No denying that lower long term rates helped consumers through lower loan payments, giving them more money to spend in the real economy. No doubt either that QE caused some damage in other areas of the economy. As with every economic policy decision there are winners and losers. I believe the Feds actions were overall more helpful than harmful, and that they should have been even more agressive. A 4% inflation rate (what it was when it was “Morning in America”) would have done a lot to reduce the debt overhang and get the economy moving.

    BTW – the author says this is the worst economic recovery ever. Correlation does not imply causation. Look at the decrease in Federal, State, and Local payrolls over the course of the recovery. That is more accountable for the anemic recovery than QE.

  • Edward
  • Anonymous

    I have noticed Rosie has backed off predictions like 99% sure we will have a recession in 2011 while appearing on CNBC. At least his predictions are less exact regarding timing. His analysis is always insightful and well thought out so let’s hope he continues to stay away from forecasting.