As we wave goodbye to David Rosenberg, with his last free Breakfast with Dave issue coming out today, we present his most recent free thoughts on QE3.
QE3 WILL COME BUT NOT AS EARLY AS MR. MARKET WOULD LIKE
Portfolio managers as a group are running their funds overweight equities by an average of 67% relative to their typical benchmarks. And polls show that one-third of them believe QE3 is coming this summer. We already know that this Bernanke-led Fed is willing to be extremely aggressive, but as we saw in 2010, the hurdle is high for quantitative easing. We need (i) signs of a double-dip, (ii) a stock market correction of at least 15%, and (iii) deflation, not inflation. How on earth will the Fed be able to do anything at all by then if headline inflation is running north of 4% and the other central banks of the world are either snuggling policy or moving in that direction ? unless the central bank really wants to trash the dollar. We are certainly not inflationists and still see deflation in credit, real wages and housing prices.
Since the market will have a heart attack unless QE3 resumes on July 1, we tend to agree. July 2 would be quite a delay and certainly "not as early as Mr. Market would like." In the meantime expect a complete washout in all asset classes with an emphasis on commodities, which will allow the FOMC to push the reset button on inflationary expectations, and announce QE3 the very next day.