Rosenberg On The Probability Of Another QE Round

Tyler Durden's picture

While Zero Hedge is confident that Bernanke will have absolutely no option but to continue with bond monetizations well beyond June, if for no other reason then because foreign Treasury buyers continue to be on a buying strike (except for the "UK" buyers of course) as confirmed by today's TIC data, which coupled with another $3 trillion in deficit funding needed over the next two years, means the Fed will increasingly have to step in and fill the debt issuance void which is now entirely picked up by the Frost-Sack FRBNY dynamic duo. That said there is one major trade off, and it is surging commodity price inflation, which as we have been predicting for over a year, will take the world by storm (literally and metaphorically) as excess liquidity finds new and unmet markets (and leading to such side effects as now well-publicized revolutions). Then again, Ben does not see it and thus it must not exist. By now everyone is aware that Benanke's self delusion is unmatched by any previously in the history of the world, so this can and will go on for a long time, until the same "excess slack" which forced the presidential overthrow in Tunisia reverberates around the developed world. And while we are confident that Bernanke will not stop at anything in his plan of global genocide to provide for infinite banker wealth, others such as David Rosenberg are not quite as sure. Here are Rosie's latest thoughts on the probability of yet another round of QE to follow once the current one is completed in June.

There is simply not a bailout plan, globally, that investors do not absolutely love (where exactly does the money come from and where would it have gone absent the need for these financial lifelines?). The U.S. dollar, in turn, is back in sick-bay as it slips back below its 50- and 100-day moving averages after a failed test, and this in turn is adding some impetus to the rally in commodity prices. The Canadian dollar has responded in kind (as have other resource-based currencies) by firming to its highest level in 2½ years.

Ben Bernanke’s QE program may well have induced a nice positive equity wealth effect but by inducing investment flows into all asset classes, food inflation has emerged, along with energy, as a potential source of global economic weakness and strife as prices soar in China and India and riots start to break out in Africa. Gold is rallying today though the chart does look quite choppy and sloppy right now — while we remain long-term bulls, one must wonder if things are starting to become a little nutty when you read stories (as we did this morning on Bloomberg News) that vending machines selling bullion are starting to be installed in Japan.

As we said before, movements in oil prices still exert a statistically significant impact on the economy and earnings with a 12-24 month lag. In other words, growth was still receiving a tailwind from the sharp downdraft in crude prices experienced from mid-2008 to early 2009 right through last year. But the gig is up and the economy is going to feel the effects of the near-120% surge in oil prices for the balance of 2011 and into 2012 barring a reversal. Only once in the past did the U.S. economy fail to sputter or head into outright recession after such a two-year surge in oil prices (food will only make matters worse in terms of depressing real wages) and that was in 2006 when the economy generated over two million jobs, the unemployment rate was 4.5%, wages were rising at a 6% annual rate, home prices rose an average of 8%, and bank credit expanded 10%. Those offsets are not in play this year.

And the question is whether the Fed would dare embark on QE3 with headline inflation in acceleration mode (even if core is still well contained). It’s one thing to bring on QE1 when oil prices are at $45/bbl and the CRB spot index is sitting at 325 (futures at 215) as was the case in March 2009. And then to announce QE2 nearly 18 months later when oil is sitting at $75/bbl and the CRB is sitting at 380 (futures were at 270). But can the Fed really be serious about yet another round of balance sheet expansion to please the stock market when oil is now above $90/bbl and the CRB is at a record high of over 530 (futures now north of 330)? Talk about rolling the dice with the bond market vigilantes.

Also, have a look at The Latest American Export: Inflation in the op-ed pages (A17 to be precise) of the WSJ. Indeed, not only has the Fed managed to create an illusion of prosperity by stepping up the print press and swinging the stock market around with QE2 chatter last summer, but now it is actually helping the government cause a de facto real appreciation of the yuan by pursing a back-door policy of boosting inflation in China. Bernanke is a true magician, no question about it.

Then again, the name of the game seems to be to kick the can down the road as far as it will go, buy as much time as possible, and hope that the economy can manage to grow out of all its imbalances from bad debt elimination, excess supply of housing, and pregnant government balance sheets. Bringing back mark-to-model accounting in the banking sector was the first move. Using TARP money as an industrial bailout strategy was next and right out of the 1930s FDR playbook. Goosing the fiscal system and adding to a deficit that was already running at nearly 10% of GDP was another, including a raid of Social Security and not allowing a 10-year tax cut to expire that was always destined to do so (a tax cut that was implemented to deal with the 2001 tech-wreck recession, not the 2010 stuck-in-the-mud recovery). The Fed was going to start shrinking its balance sheet a year ago, but instead re-expanded it by the end of the summer and is now thumbing the nose of the new Congress by hinting at doing even more to keep the speculative stock market rally alive. And the ballyhooed financial overhaul continues to miss deadlines and in fact has no teeth as it is — why cook the goose that lays the golden credit egg and must play a role in a leveraged economic expansion?

The complexity in the banking system remains as opaque as ever and now the lenders are generating profits by drawing on their loan loss reserves at a time when the unemployment rate is still perilously close to double-digits. The can has indeed been kicked down the road. Outside of selected state legislatures (see what Vallejo is doing to pension and benefits on page A6 of the WSJ), the tough decisions have been delayed and as a result, the next bear market and recession may end up looking just as bad as the last one. The only thing we seemed to have learned coming out of the credit bubble was to add even more debt to the overall national balance sheet. But as we saw in Ireland, not even the lucky can expand its debt at a faster rate than nominal income forever, especially now that the ratio in the U.S.A. is heading to unprecedented heights for a peace-time economy and to levels that end up impairing growth in the nation’s private sector capital stock. Borrowed time, that’s what the bulls have on their side. But we’ll see for how much longer, especially as the debt ceiling file plays out (see New Calls on GOP Side Not to Lift Debt Limit on page A8 of the WSJ).

With portfolio managers cash ratios back close to levels that they were at in the fall of 2007 and still just a trickle of inflows into mutual funds, the only source of buying power we can see in the equity market is leverage (the surge in margin borrowing) and massive short covering (short interest on the NYSE plunged 5.5% in the second half of December, which largely explains why the stock market absolutely rocketed during the month). If you want to have a good look at the consensus view see the editorial by BlackRock’s Bob Doll on page 22 of the FT (Prepare for Another Fine Surprise from U.S. Equities). Bob and I part ways on the outlook but we are old friends and collegues and he is still worth listening to.

And even if Bernanke's QE decision is independent of bond demand considerations, the truth is that the economy continues to slug through (and outperform only exclusively due to trillions in fiscal and monetary stimuli). Here are the most notable headwinds before the economy as evident to Rosie:

It is truly difficult to understand why it is that everyone is so whipped up about U.S. growth prospects. Even the latest set of data points has been less than exciting. Retail sales, payrolls, and consumer confidence have all been below expected and all of a sudden we see that jobless claims are moving back up. The deceleration in core capex orders is quite telling and housing remains firmly in the doldrums. To be sure, we have a slate of “diffusion” surveys telling us that businesses are feeling better — the ISMs, the IBD/TIPP survey, the NFIB and the array of regional manufacturing surveys too, but over 70% of the U.S. GDP is the consumer and we did seem to close out 2010 with real spending and wages roughly flat. Is that good? Or perhaps there is now this widespread belief that the government will stop at nothing to achieve the holy grail of sustainable economic growth and revived animal spirits among the investing class. The Fed has made it quite clear that the road to prosperity lies through the equity market, and that the primary objective of quantitative easing was to generate a positive equity wealth effect on consumer and business spending. So far, the stock market is biting because the rally has been non-stop in nature for months now and whatever givebacks we see are brief affairs and widely treated as buying opportunities. Hope springs eternal, so much so, that even soft economic data like we saw last Friday are treated with little more than a shrug of the shoulder.

The S&P 500 may still be some 17% away from its prior peak, but the Wilshire 5000 just closed at a new high after last week’s 1.8% advance, and in the short span of just 22 months, has managed to double (+100%). In other words, from the March 2009 lows, $8.3 trillion of paper wealth has been created. Thanks Ben! The S&P 400 midcap index is at a new high too, as is the Wilshire small-cap index, piercing its old high set back on July 13, 2007.

The Dow has now gained ground in each of the past seven weeks. The last time it did that was back in the week ending April 23, 2010. Ahem. A month later, it was down 1,200 points. You see, nothing lasts forever, not even a speculative bounce. The Shiller cyclically-adjusted P/E ratio has expanded for six months in a row and at 23.3x in January is now at its highest level in nearly three years. Sentiment is wildly bullish. The market is seriously overbought, and it is expensive on a “normalized” earnings basis.

In any event, as we look to the months and quarters ahead, what do we see? We see that the Federal government just announced a bonanza of $858 billion of stimulus measures towards the end of last year. Of course, almost all of that just ensures that Washington will not be a source of contraction this year, but the psychological impact has been huge so far. The Fed has allowed its balance sheet to explode even further to obscene levels of $2.43 trillion or triple what it was before the financial crisis took hold. In the past three years, the Fed’s balance sheet has expanded by $1.5 trillion and nominal GDP has only managed to rise over $500 billion. Fascinating. And we had the U.S. public debt explode by $5 trillion over that same time frame — the country is 244 years old and over one-third of the national debt has been created in just the past three years. Incredible. The U.S. government now spends $1.60 in goods and services for every dollar it is taking in with respect to revenues which is unheard of — this ratio never got much above $1.20, not even during the previous severe economic setbacks in the early 1980s and early 1990s.

So we have federal fiscal support, which at the margin is subsiding. And we have massive monetary support, and on this score the Fed is going to be facing much more intense congressional scrutiny going forward.

At the same time, it should be remembered that about half of last year’s GDP growth was inventory accumulation. That is about to come to an end.

Net exports in 2010 received support from accelerating global growth and the tailwind of a roughly 5% decline in the U.S. dollar from a year earlier. Now we have half of U.S. exports being negatively affected by policy-induced decelerations in Europe and non-Japan Asia.

The slowing trend in capital goods orders suggests that business spending growth will end up being half the 15% increase we enjoyed in 2010.

Illinois just raised taxes that will drain $6.5 billion from the regional economy and California is planning $12.5 billion in spending cuts.

All told, we could easily see $65 billion of fiscal restraint from the lower levels of government this year, which is akin to a 0.5% drag from baseline GDP growth.

If the GOP in Congress gets its way, in order to get the debt ceiling passed, we will see $50 billion of federal spending restraint this year too.

If home prices go down another 10-20%, as even some Fed district banks think is possible, that could end up curtailing consumer spending by a full percent via negative wealth effects on the personal savings rate. The question here is whether an overvalued stock market can serve as an antidote.

Vacancy rates are still far too high to believe that construction spending, residential or commercial, will be contributing to overall economic growth this year.

Interest rates are no longer declining and in 2010 this offered $100 billion of debt service support to the household sector.

Finally, the food and energy bill combined can be expected to drain $100 billion out of household cash flow this year too. As we saw in December, real spending looked flat and real wages are now down in three of the past four months. And the salutary effects of the payroll tax cut will only be felt incrementally this quarter. Look for air pockets thereafter.

Bottom line: Growth projections of 3-4% for 2011 look quite spurious to us even if the markets seem to have recently been buying into this supercharged consensus view.

The bottom line, to us, is that denial, and existence in a mythical world where facts absolutely don't matter can only continue for so long. As always, the best way to bet on the moment this arrangement fails is to buy the cheapest possible fat tail insurance one can find. And for that we once again refer readers to the most recent comprehensive presentation put together by SocGen on tail risk. We can only urge everyone to protect their gains, be they in gold, treasurys or Apple stock (preferably in the cheapest possible way).

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JW n FL's picture


Got ammo?

BlackSea's picture

Does being long cotton and gold count?

JW n FL's picture

Only if it is your farm and in your safe...

JW n FL's picture

like anywhere else... how well are you plugged in? how much security can you carry, beyond the conventional? are you worth more alive to them or dead?

DoChenRollingBearing's picture

JW in essence is pointing out that DIVERSIFICATION is very important.  Real diversification across all kinds of asset classes.

-- precious metals & commodities

-- guns & ammo

-- stocks, bonds, cash

-- real estate 

-- money / investment overseas

-- out of debt

Throw in some alertness and agility with the above, and you should be OK.

Dapper Dan's picture

You forgot about having a rock solid group of friends and family that will cover your back,  tend to your wounds or walk point if needed. 

Attn: Government trolls,  the above is all metaphors

lunaticfringe's picture

you forgot porn and motorcycle tires. FIFY

bonddude's picture

Don't forget a stash of canned food. Corned Beef Hash, dinty moore stew,

and Spam keep forever. Incidentally, here's another cartoon about local bank

fraud involving a TARP recipient bank.

DoChenRollingBearing's picture

Dapper, lunatic, bond,

Quite correct, not a complete list.  Add:

-- food

-- first aid kit & pharmaceuticals

-- other survival stuff

-- farm land

-- Etc.

JW n FL's picture

Thanks! you have been here long enough to know where my family is going of the shit gets iffy... (ish)... but having a way to get what is really important, REALLY IMPORTANT!! like family, lil ones.. the women... thats where its really at... if you dont have a sucession plan, get one.


Being a Boy Scout, seriously ALL! please be prepared for any and everything... SERIOUSLY!


That does not mean quit your job and dig a bunker... it means go work, be productive... try to carry the weight of all those out of work ignorant fucks... but if the police force(s) start to suffer to, too much so will over all quality of life. Thusly protection for those who are not really of a solid awarness. the list keeps going and going and fucking going... but PLEASE EVERYONE! have a plan "B".

TruthInSunshine's picture

Harry Wanger says:

"We are all Citi, Bank of America, JP Morgues & Vampire Squids, now!

Whether lean or fat, flush or busted, we Unite for Truth, Justice & The New Amerikan Way! 

Strength through Unity! Unity through faith!

War is Peace! Ignorance is Strength!"

the rookie cynic's picture

And, and...Freedom from Harry is slavery. (Wait, did I just say that.)

Eally Ucked's picture

Just look what is going on around you, they're showing that they are ready for you with your ammo and guns. Maybe they're not really ready that's why all those displays of power.

Just look at at Toronto today, thousands of police marching, millions of dollars spent and for what? One policeman died on duty, killed by plough, and I know that police job is not the easiest one but at the same time half of them are so corrupt. So what is the purpose of that display?

Dr. Porkchop's picture

You hear that? That's the sound of inevitability.

Dr. Porkchop's picture

So we should buy the Apple dip?

HarryWanger's picture

Already 10 pts. off its low today. It was an easy BTD. My guess is, they put out the Jobs news yesterday for several reasons but one was they knew the earnings would be a blowout so any drop in stock price would be recovered AH. So yes, BTD!

shushup's picture

Yes - They knew last qtr was going to be a blowout also. Guess what? Dropped 20 points after earnings announcement. You'd deserve it if it happens again.

HarryWanger's picture

You missed the point. They manufactured the "sell off" before earnings. They would not have made the Jobs announcement yesterday if they weren't going to announce blow out earnings. That's why the stock rallied hard off of its low today.

Dr. Porkchop's picture

I refuse to buy if it ain't a Heluva Good dip.

BlackSea's picture

Yes, BTFD. It is rumored that unlike gold, which every shill knows is not collectible, you CAN actually eat IPads.

HarryWanger's picture

No doubt in my mind there will be a QE3 and beyond until we are firmly generating self-sustaining growth. While we are seeing hints of that in the data now, it's going to take more stimulus to create an organic growth cycle. Whether that takes QE3, 4 or 5, it will happen. It's just a matter of time and patience.

Spitzer's picture

They are still waiting in Japan and Zimbabwe. Show me one time in history that a central bank created self sustaining growth by buying government debt.

DoChenRollingBearing's picture

+ $1365 Spitzer

I ain't buying what the Fed and .gov are selling.  Neither should anyone else here.

Spalding_Smailes's picture

Because .... 

World reserve currency status - ( They did not have this honor ).

International Finance - ( Derivatives ) How will they swap out our/global dollar positions/Forex - Dollars.

International pricing currency for products traded on a global market ( letters of credit ) and commodities ( oil, gold, ect, ect ... )

We borrow at a better rate because of this.

Network externalities.

2/3 of foreign exchange reserves in dollars over last 10 years.

Dollar denominated debt forces host countries to continue purchasing treasuries because if they do not, the currency will soar' crushing the manufactures and banks.

Global businesses continue borrowing in dollars 24/7/360.

Spitzer's picture

The British had the world reserve currency status so ^ all of that muttering doesn't wash.


Prof Gulliver's picture

If you QE forever -- which is the plan -- there's your sustaining. No need for organic growth, ever. Free money for the monied class. As for the middle class and below, well, the ones we are forced to see around 33 Liberty seem to be doing just fine selling us pretzels and delivering our lunches.

alexwest's picture


#. Whether that takes QE3, 4 or 5, it will happen. It's just a matter of time and patience.

are you mentally challenged? then you 'are at the wrong place..

in 2 years US national debt gonna be at least 18 trln $ and debt servicing is 50% of federal revenues..

only exit is WEIMAR HYPER IFLAITON WAY... there's no any cases in history of countries who prints 1$ for each 1$ in revenues to dig out and survive...

and i'd say 50/50 USA is going to be same country ,, or bunch of (3..5) different countries...

its clear North-West is going to be part of Canada..


JW n FL's picture

sure the population of california is going to walk into montana and tell those boys anything... thats fucking funny!!!!!

Cognitive Dissonance's picture

While we are seeing hints of that in the data now, it's going to take more stimulus to create an organic growth cycle.

Considering all the shit that's being shoveled I suspect something organic will eventually grow.

JW n FL's picture

becuase you said it... rolling laughter... you should be able to hear me all the way to your house... Thanks!!!!!!!!

LawsofPhysics's picture

Yes, like most self-serving retards that live in a fantasy world where people don't need any real commodities or real energy to create real value, Harry just wants to die rich, after that he could care less.


LawsofPhysics's picture

Using the current economic model, inexpensive energy and labor drive economies, NOT cheap fiat paper.  History has shown this over and over and over...

Rogerwilco's picture

"No doubt in my mind there will be a QE3 and beyond until we are firmly generating self-sustaining growth."


Perhaps the most amazing comment ever to grace ZH. The laws of Nature have been repealed.

ForWhomTheTollBuilds's picture

Sometimes, I think you make remarks like this just to see how we will react.  Why is our state of mind important to you?

ElvisDog's picture

Every cycle of QE weakens the private economy further because the overall economy becomes more and more dependent on government deficit spending to continue. Government spending has never created "an organic growth cycle". A good example is in the 1930's. As soon as Roosevelt cut back on the stimulus in 1937, the economy slipped right back into recession.

Bay of Pigs's picture


That sums it up quite nicely. Why people like Harry can't/won't see this is remarkable.

The increasingly US style (Soviet) system is going to implode. 100% certain.

the rookie cynic's picture

Over the years, the USA has refused to let recessions clear out the rot.

So instead of 7-8 corrections, we're going to have a huge bust.

None of the PTB want a recession on their watch, let alone one of the biggest (if not the biggest) busts in history.

It's a colossal game of kick the can down the road while playing chicken with oil and nukes.


JW n FL's picture

"So we have federal fiscal support, which at the margin is subsiding. And we have massive monetary support, and on this score the Fed is going to be facing much more intense congressional scrutiny going forward."







topcallingtroll's picture

Praise be to st vincent. It is all part of his grand plan. The demon midget GG cannot prevail against our dumb drunk irish fuck who will save us. Just watch.

alexwest's picture

fat Rosie probably gonna have heart attack

#which coupled with another $3 trillion in deficit funding #needed over the next two years

really ,, no Q3..Qnnn???? I hope somebody is gonna ask Rosie -fatasshole how USA federal goverment is gonna balance HUGE GIANT BLACK HOLE .. it's at least 1.5 $ trln this year ..
and next year..

Rosie knows by summer 10yy gonna be 4 /4.5 % and his nice fat job of peddling buying 10yy USA bonds w/ yield 2-3% in world where real life inflation (aka cost of life) at least 7% is OVER...

say bye bye Rosie.. seems he out of words so more and more BS charts in daily stuff


Mudflap's picture

"vending machines selling bullion are starting to be installed in Japan"

Oh my!

Has to contain more real value than your average ATM by far.  Drop in $1,500 in change please...

Spitzer's picture


Rosy has shown again that he is not on the same level as the Fabers and the Schiffs of the world, not even close.

Spalding_Smailes's picture

Ya schiff ....

He had another video out on friday. Hes been dead wrong for 24 months now but hey maybe his flock will buy LuLu or NVDA and try recouping some cash ...

The dollar iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiis about almost, hold it, hold it .........hyperinfla........ 

Now he travels the globe living off " 2005 call " ...... ( Big deal EJ gave me the heads up in 2002 ) 

Schiff = Dustbin........... " When they stop buying dollars ...... " bla, bla, bla ....

Spalding_Smailes's picture

Now I get it ..... He's a fucking gold salesman............. A gold whore/pimp/shill !!!

Video ( 2008 ) Pimping his gold sales, more wrong calls !!!

The fraud is uncovered.



Peter Schiff - Gold At $5000.00 By 2012? - Dollar Never Recovers? - Game Over?

Spitzer's picture

Video ( 2008 ) Pimping his gold sales, more wrong calls !!!

did i read that right ? Pimping gold sales in 2008 is a wrong call ?

Checked the price of gold lately ?