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.