BofA's Jeffrey Rosenberg Blasts QE2, Says It Will Lead To Bubbles And Further Confidence Destruction

Tyler Durden's picture

That David Rosenberg is very much against QE2 is no surprise (although for such a bond bull he should be exalted) - he knows all too well that the cost/benefit analysis of QE2 just does not make sense: to pick a few bps in GDP in exchange for trillions in new debt (while letting the bankers send the CRB to imminent all time record highs) is simply moronic, and positions US society one step closer to civil war if not worse. Of course it is this kind of truthy candor that cost him his job at BofA. What we are more surprised by is that the "other" Rosenberg - a/k/a Chief Credit Strategist Jeffrey, and the smartest person left at the bank, has just released one of the most scathing reviews from a TBTF bank on the topic of (at least) doubling bank reserve, and that it will do absolutely nothing beneficial, now that lack of liquidity is no longer the economic threat, and if nothing else, will lead to much more bubble creation. As he says: "the costs of further QE2 in the form of raising the risks of asset bubbles - now in emerging markets as opposed to housing - should provide greater ballast against the gusts blowing in the direction of further liquidity provision." Alas, it is too late, and Bernanke will stop at nothing in his attempt to destroy America, absent several million iPitchfork-friendly, very angry, and very hungry people showing up at the doorstep of the Marriner Eccles building.

Jeffrey Rosenberg explains why, in an ironic twist, every "QE2-pricing in" uptick in stocks brings America closer one step to total societal collapse.

Today’s minutes and Fed speeches continued the debate over QE2. Financial market participants and our economics team appear decided: QE2 in November is all but certain and the only debate stands over the details of implementation. Count us as skeptical if not on the likelihood of QE2 then certainly on its effectiveness and its impact on risky assets. Our arguments stand in line with the few skeptics at the Fed that liquidity is no longer the problem hence cannot be the solution. Moreover too much liquidity now is itself becoming a problem. As credit strategists and not economists the painful memories of a credit fueled housing price bubble - fueled in large part by the coincident global monetary policy accommodation of that era - appear too eerily similar. That experience in our view should argue that the costs of further QE2 in the form of raising the risks of asset bubbles - now in emerging markets as opposed to housing - should provide greater ballast against the gusts blowing in the direction of further liquidity provision.

Liquidity is no longer the problem

The economic stimulus of QE2 in theory flows through to the real economy through raising asset prices (bolstering consumer confidence), lowering credit costs (primarily through mortgage and corporate refinancing activity) and improving US terms of trade through dollar depreciation. In our view however each of the costs associated with these potential benefits may end up outweighing the benefits. It is not the supply or cost of credit that is currently the deterrent to economic activity. Rather, confidence remains low, suppressing investment and demand for credit. This is evident for example in the increase in cash on bank balance sheets rather than increase in loans after QE1 (Figure 2), as the demand for loans remained low despite easing of credit standards (Figure 3).

The lack of business willingness to invest is also reflected in BofAML analyst projections for 2011 that forecast revenue at nonfinancial US companies1 to be up 8%, free cash flow to increase 23%, cash on balance sheet to increase 20%, but capex to decline 1%. That highlights to us the ample cash positions of corporates but an unwillingness to use that cash (as well as ample access to credit) to fuel spending as confidence rather than credit now stands as the main impediment to recovery.

Besides businesses, benefits to other parts of the economy are also suspect. For example, as rates have declined to record lows, mortgage refinancing activity remains far below the levels seen in earlier waves (Figure 4). That reflects the breakdown in the transmission channel of lower rates to the consumer through mortgage refinancing as a result of negative housing equity, consumer credit quality erosion and constrained refinancing capacity. The benefit of lower rates instead seems to accrue yet again to financial markets, with strong flows to emerging markets - as yields decline in the US - and a rally in the US stock market recently on the prospects of QE2. This highlights the key issue with using monetary policy as a tool to solve a problem that does not have liquidity as its root cause. The costs of further QE may be in the form of raising the risk of asset bubbles as well as reducing confidence as an unintended consequence of extending QE.

Hey David, does Gluskin Sheff have some space for your former colleague Jeffrey? After Obama and his boss Ben Shalom read this, he may need a new (and offshore) job.

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HelluvaEngineer's picture

Summary: no one gives a shit

SheepDog-One's picture

Everyone smokin huge bowls of Hopium. Laughing as I watch them pump the DOW up exactly 80, and put the lock on it while gold soars $22.

Nevermind the reason for the Hopium fest today is INTC and JPM 'great news', both down on open. 

whatsinaname's picture

Does Rosenberg run a bear fund ?

Must be getting sheared off if he is.

Bill Lumbergh's picture

Further confidence destruction...what confidence is left at this point in the system with these madmen in control.

Assetman's picture

First, the $USD will race down due to a loss of confidence in the foreign exchange markets.

After that, it will be our turn.

Nice going, Benny.

Lucius Cornelius Sulla's picture

Not if the EU or Japan can help it.  In case you haven't noticed we have entered a "competitive devaluation" phase.

Assetman's picture

Well... the point is that the EU and Japan CAN'T help it... and won't be that "competitive".  The decisionmakers in the EU and Japan know full well well the endgame with competitive devaluation, anyway (they lose).  Heck, the Germans would actually prefer seeing recession over the risk of trashing their own currency to oblivion... and yeah, it is essentially their currency.

Nope both the EU and Japan stand a better chance of dumping the globe's reserve currency en masse for gold than attempting something that guarantees abject failure.  At least with gold, you can always buy something back.

Lucius Cornelius Sulla's picture

That's why I think the Euro will fall to zero before the dollar.  The currency regime will fail.  As for the Yen ... they invented QE!

Assetman's picture

The Euro appears likely to fall apart because increasingly divergent fiscal needs within the member states.  Ironically, the Euro could well disband as the currency is rising (versus being at zero)-- as the weaker debtor nations there may have no other choice. If so, the reinvented DM and the CHF are certainly in a position to outlast the $USD.  The drachma?  Not so much...

The Japanese will try more QE, but they know they can't win.  The currency intervention BS was funny.

This is really a US - China standoff in the end.  And while China hasn't won many friends on the international trade debate, the U.S. has not made any friends on flooding the world with irresposible U.S. credit.  The risk is if there is a concerted effort reject the $USD as the reserve currency.  That's how far this can go.

And China?   It has the surplus and the trump cards to cause some major havoc... if they so choose.  I can't believe they haven't used them by now... and I think the Fed is betting they won't.  Risky bet, in my view.

Lucius Cornelius Sulla's picture

Agreed.  That is why I think QE2 is hyperbole.  The FED is holding a weak hand.  There is no way they will piss off their biggest customer with the massive deficit spending requirements of the USG.  IMO, China is most likely approving every move in back room negotiations.  They will have their say.

Apostate's picture

What, me worry?

Have no fear, friends. It's all in the capable hands of our benevolent PhD overlords. 

Mad Mad Woman's picture

Why is Bernanke still going to go through with QE2? Or is this another transfer of money to Wall Street?

We could use that $1 - $1.5 trillion and put it toward the infrastructure program that Obama wants to come out with. That would do more good than just over-saturating the market with more cash. It would create more jobs and really bump up the economy.

I thought ol' Ben was a student of the Great Depression and would know what to do to avoid a recurrence? With his actions he's driving us closer to the edge.....

Bob's picture

Infrastructure doesn't show any longer term return on investment  without an underlying jobs infrastructure for it to service.  What do you wanna build--high speed rail from one economic dead zone to another or better roads for fewer cars running on $10/gal gas? 

Think about it.  It's a terrible waste of "stimulus" money. 

Mad Mad Woman's picture

What would you suggest?

njdoo7's picture

Why does he need to suggest something to say that your suggestion is flawed?  Let apply the same logic to a civil engineer evaluating structural problems with a bridge.  Does he need to have blueprints for a better bridge to determine that an existing bridge will collapse?  Discussion of a better solution is definitely warranted, but it appears you expect a better one to be offered if yours is to be criticized.  

Assetman's picture

Bernanke is using QE2 as a means to target inflation.  While they only have rudimentary means to do so.  That is the official word.  Of course, ZIRP/QE are very rudimentary means to target inflation levels... so they could be off several hundred basis points or so... if things don't go hyper-inflationary.

Like QE1, a vast majority of the benefits that accrue from QE2 will remain in the banking system.  Us peons might get 50 basis points better to refinance our mortgages-- but a large part of the population needs to save-- not go into more debt.  As with QE1, QE2 won't help savers at all.

There's a misguided perception at the Fed that providing even more liquidity will increase consumer confidence, and thus, spending.  The risk of QE2 may well be the opposite, especially if commodity inflation takes off-- but wages remain stagnant.

Clearly, not enough of the liquidity is getting into the economy.  In fact, there's probably enough excess liquidity from QE1 to increase velocity... but the Fed wants that liquidity in bank balance sheets.   It's terribly inefficient, and in the case of QE2, may result in more visible moral hazard. 

While infrastructure spending makes more sense than QE2, the focus on government stimulus needs to be more strategic, more long-term.  We need to focus efforts on moving into energy efficiency and building a next generation infrastructure for an enegy independent society.  Much of that spending though, is the R&D type, though there can be projects that help of the efficiency side today.

I'm really beginning to believe those dolts at the FOMC have no earthly idea what they're doing, save Hoenig.  There's more than enough liquidity in the system-- but it's not being used efficiently.  QE2 won't move the needle as intended, but it will result in inflationary pressures, asset bubbles-- and quite possibly a currency crisis.  Just keep in mind, many of us had these "running off a cliff" fears as Ben Bernanke was facing re-confirmation-- and many of us expressed that to our Congresscritters.  Yet they voted him back anyway.


Miles Kendig's picture

How can we have an expectation that the FOMC and its actions are in any way designed to actually improve the economic situation (on Main Street)?  I ask Assetman simply because the overwhelming thrust to date has been to back fill bank balance sheets (creating improved churn & bonus's on Wall Street), which is not the same thing under current circumstances.

Assetman's picture

Well, we really can't, can we?

The Fed is providing justification for more monetization as a means to support asset prices, for which they think will lead to a better employment picture and improved consumer spending.  Their tools are too crude to control emplyment or spending-- without consequences.  Better yet, there are ways to increase money velocity that would make the need for QE2 pretty minimal.  So yes, you're right... QE1 bought the banks more time... why should it be any different now?

More importantly, is Fed is now essentially exporting crappy dollar-based credit to the rest of the world.  The expectation is that a much weaker dollar will result in higher exports to the rest of the world-- and voila!, we're saved...

Can you see how all this can backfire on the Fed?  Domestically, we can see inflation appear suddenly with no change in wages (stagflation)... and the Fed may not be able to control the level of prices, due to the internal financing (deficit) needs of our own spend-crazy government. 

Outside the U.S., other central banks may start looking at the U.S. liquidity flood as a global form of financial terrorism... and respond accordingly.  Even more basic, many countries with rising currencies may be mired in another deep recession due to U.S. actions.  Who needs the $USD as a reserve currency when the person running those presses is a madman?

Perhaps none of that will happen.  I think with fresh QE in the U.S., the risks are increasing each and every day that there will be a nasty backfire effect.  My guess is that it will start in FX-land, though.

Miles Kendig's picture

Thank you

I have found that in dealing with the fed, justifications amount to another rendition of; "Believe what we tell you, not what you see".

If the fed had any desire to ensure price stability they would not be engaging in actions that are in essence blowing commodities past 300, the 2/10 under 200 enroute to 150 and beyond, the fx debauchery and all the rest.  Most folks believe I am way to early with my call that the fed will be forced, soon, to begin direct visual support of CRE and its related products.  The same holds true regarding the TBTF institutions short and medium term paper now that their spreads have started to move.  A move that cannot but pick up steam in the coming days, weeks & months.

Who can blame other countries for getting their panties in a twist over your aptly named financial terrorism?  The kicker here is that these other countries will either kow tow for the nearly free money in perpetuity (meaning until the whole of the edifice collapses), or they will cut the cord and take their lumps in the short term collapse, or near collapse of their own monetary systems and infrastructure. This kind of action traditionally (and this time would most likely be no different) leads to war, be it currency, trade, disruptive PSYOP, an actual shooting war or some combination.

Regardless, the feds actions have already backfired.  Hell, even I can see this sitting on my front porch watching the world go by here off south main street.  FX land has been the tale of rotating legs of a stool enroute to MAD.  Everyone else realizes they are caught in a dollar trap and nearly all options involve massive pain and dislocation. It's just too damn bad no one in authority has the stones to staunch the bleeding since there is no anesthesia that can do the job and the only implements available are nearly as as crude as the feds.  This is what we get for expecting our leaders to please rather than actually lead.

Best to you and yours...

Assetman's picture

Most folks believe I am way to early with my call that the fed will be forced, soon, to begin direct visual support of CRE and its related products.  The same holds true regarding the TBTF institutions short and medium term paper now that their spreads have started to move.  A move that cannot but pick up steam in the coming days, weeks & months

Great comments, Miles... the above particularly caught my eye, as I've been thinking about what the Fed will try to save next.  It may well come sooner than most think.

What I'm left with, though, is an increasing possibility that the Fed may be forced to choose between backstopping CRE-- or maintain its dual mandates of price stability and full employment.  I think any incremental bailout from this point risks price stability, as the world is getting Fed up with U.S. credit, and the American people are more than Fed up with moral hazard.  But with Ben shitting bricks from the printing press, he may not care.

There's a lot Uncle Ben has managed to f-up in the last 18 months.  And from the looks of it, he's just getting started.

Best to yours as well...

Miles Kendig's picture

Under the emergent conditions that have existed since '07 all that crap concerning dual mandates went right out the window. 

In the eyes of our JMK centric economic gurus, without healthy TBTF's we are right into that extremely unpleasant situation of a collapsing economic infrastructure (meaning the very "heart" of our social order, the 1,000 pound persons known as the TBTF's).. along with their belief system.  The fed and the feds understand full well what a change from this course would mean as those other nations that are fully committed to wallowing in their dollar trap would consider radical measures to protect their social order.  And since hundreds of trillions are predicated on asset derived metrics the fed looks compelled to provide further covert & overt support.

Wherever we (direct, or to a lesser extent indirect market participants) find the greatest "threat" to "stability", or conversely, wherever the fed believes it can cut a clean fire break to "corral" future flows & expectations is where the fed will concentrate its efforts.   To fail to do so would welcome the very chaos they are convinced it is their job to prevent.  Too bad the way they were supposed to prevent all this was through being the cop on the beat rather than the dope dealer on the beat. 

The fact remains that an ever increased portion of society knows shit is amiss and all of the tools under the fed & the feds control cannot change it.  One way or another the micro imperatives will assert themselves and the last folks on the planet we can ever expect to respect that are the macro centrists.

Lucius Cornelius Sulla's picture

Wall Street benefits from the debt servicing and asset bubbles, China benefits from the production of any new goods circulating in the economy (not main street).  Banks and other creditors (not main street) benefit as the FED transfers risk (and credit losses) to taxpayers.  Credit pumping and any subsequent rise in GNP coorelates with trade imbalances.  Meanhwhile, USA unemployment hasn't improved.  Why do you think the Chinese keep funding our government?

sweet ebony diamond's picture

I hereby declare that this man should get a bonus equivalent to 100,000 doctors.

The reports he produces has alot of pictures with colourful lines and he produces alot of them.

SteveNYC's picture

Can any of you "techies" out there figure out if the DXY is forming a bottom at 77?? Looks like everything from stocks to gold to the AUD is in parabolic blow-off phase, and the DXY might be finding a base. Any insight would be helpful.

BTW: I'm a big fan of the yellow stuff, just thinking it might be time for a (minor) pullback. I think stocks/AUD will take it much harder than ol' yellow.....

SheepDog-One's picture

I always thought 'bottom picking' was for chimpanzees.

SteveNYC's picture

I'll take a qualified opinion from a chimpanzee, we have a monkey running the Fed so why the fuck not?

goldmiddelfinger's picture

I rather like bubbles. Tell me where it will form and I will see ya there!

TradingJoe's picture

Keep it going Benjie, very soon you will be forced to take a leave of absence!! The definite One!

treemagnet's picture

So why aren't people buying insurance (VIX/puts/shorts) against this equity bubble?  I would've guessed the higher this QE2 induced fantasy climbs folks would look down and wonder "what if" - what gives?

SheepDog-One's picture

I dont know treemagnet, maybe everyones really sucking in great clouds of Hopium! All I hear today are things like 'stocks can never go down again', FED has this all under total control now' and other such ridiculous nonsense, really a wild time with gold up $22 today. I conclude some dam has to break real soon!

SheepDog-One's picture

What? Central banksters not so much on the Q/E2 train? Seems cracks are widening on that 'done deal' Q/E which has been priced into stocks 1,200 DOW points ago? Cant be good...somethings about to bust wide open here real soon, SOMETHINGS GOT TO GIVE!

SteveNYC's picture

This is a good point, thus my Q above on the US dollar. As much of a piece of shit that it is, I see a massive rally here when "QE Bullshit" is not executed as the "market" expects.....

DavidC's picture

The point is that the Fed has never overtly said it's GOING to QE2, only that it 'stands ready to'.

Unfortunately it's now painted itself into a corner, having sealed the windows and locked the door on the way in.

I NEVER thought that S&P 1200 would be on the cards but it's getting closer every day. I can't help feeling a stock crash is on the cards - stagflation.

This absolutely insane.

Maybe I'm the insane one shorting into each rally only for the next jump to be on the upside every time.

HelluvaEngineer's picture

See you at 1217 in a week.  Then, 0.

SheepDog-One's picture

They started this Hopium pump at around DOW 9,800 by promising a vast delivery of Q/E. $5 trillion was mentioned, IMF said $7 trillion Q/E is needed, so 1,300 DOW points later in 1 month they say- 'Meh, Q/E, not so much...'? Someone has some real big bills to pay here! And gold is calling BS on the whole mess. When does the dam break, before or after 'elections'? May as well be before because these election results look ugly for Team Maobama. 'Plan B 'Fear and Panic' ploy before elections...seems to fit nicely.

Gimp's picture

DavidC you would be doing the logical thing "shorting into each rally" if the market was'nt RIGGGED....DOW 36,000 Bitchez

Gimp's picture

DavidC you would be doing the logical thing "shorting into each rally" if the market was'nt RIGGGED....DOW 36,000 Bitchez

Bearster's picture

Stocks rise on oceans of liquidity and HFT, but mostly oceans of liquidity.

George Costanza's picture

S&P up 1%,  Gold up 2% - that tells the story of Bernanke's wealth transfer and wealth destruction.

treemagnet's picture

Well cards on table time, I'm in VXX pretty heavy as a %, at about S&P 1040.  Watching this bullshit rally climb has been like passing a kidney stone damn near daily.  Shorts are holding, thin volume, insider selling, POMO, near term elections, fraudclosure......these are a few of my favorite things.  The only reason a want this thing to tank is 'cause it needs to so we can have a clean start - the down has to be violent to finally clean house.

PlausibleDenial's picture

Here is my question, when the market tumbles violently, will they DK the shorts?  FYI, I don't have any kidneys left as I have had to drink myself into oblivion just to sleep.... I am also short.

honestann's picture

The problem with being short is this.

You are right, but you won't be paid for being right.

The market is falling in real terms, not in dollar terms.  But you get paid for dropping in dollar terms, which Benny and the LaserJets will not allow.

We feel sad for you and all the rational folks who are being ruined by the FractionalReserveInsanity crowd.

Milton Waddams's picture

"You stupid pieces of primordial slime, I'm not blowing bubbles I'm creating the fucking universe. God's work yo."

SheepDog-One's picture

Every recent big market rampjob has been tagged with the CNBC headline 'Stawks Surge as Traders Expect FED to do Something'. Craziest BS as Ive ever seen or dreamed of.

bada boom's picture

I believe it is crazy too, but what makes you think they are not going to have more QE?  The first time around was foolish.  What's even more crazy is that if they don't it and allowed the media to hype it without dousing the flames. 

The mortgage mess / mers problems will give them the excuse they need. 


treemagnet's picture

QE2 is just worth more to ben alive then dead.  Its a single shot shotgun in a room full of bad guys - if he were gonna pull the trigger, he would have.  My "fear" is he decides "alls lost" and saves that last shot for himself and goes full QE crazy.  Otherwise, the FOMC's allready stated things are worse and worthly of more lubricant - then why not do it?  I know they know its bull, but if they keep waving the "business end" of that single shot in our faces, they buy much though, and for what?

Lucius Cornelius Sulla's picture

IMO, QE2 is nothing short of an admission that the banking system is insolvent.

Lucius Cornelius Sulla's picture

QE2 is a great jobs program ... for the Chinese!  Looking at the trade deficit and the build up of their Treasury hoard, the greater fool in the debt ponzi scheme is alive and well. 

News flash from earlier this week:  China now owns a big piece of our Texas oil fields.  Perhaps it was "negotiated" in return for continued T-bill purchases?  The charade continues, but its obvious that the Chinese are a little nervous about their Treasury hoard ... or they wouldn't be demanding hard assets.

George Costanza's picture

HFT are playing a game of chicken based on QE liquidity, has nothing to do with fundamentals.    QE is rationale for groupthink.   The HFT all use similar algos, when they decide to sell, they all will near the same time, and there will be no bottom.   I anticipate 25% to 50% losses to happen very quickly once them commence, the question is when.

Minion's picture

You just perfectly refuted the false premise that HFT algos do not obey herd mentality principles that drive Elliot Wave theory.  To put it bluntly, when the robots panic, the party will end a lot faster than when humans were driving the transactions.  :D