The Diminishing Effects Of QE Programs
There has been much angst over Bernanke's recent comments regarding an "improving economic environment" and the need to begin reducing ("taper") the current monetary interventions in the future. What is interesting, however, is the mainstream analysis which continues to focus on one data point, to the next, to determine if the Fed is going to continue its interventions. Why is this so important? Because, as we have addressed in the past, the sole driver for the markets, and the majority of economic growth, has been derived solely from the Federal Reserve's programs. The reality is that such analysis is completely useless when considering the volatility that exists in the monthly data already but then compounding that issue with rather subjective "seasonal adjustments."
The question, however, is whether such "QE" programs have actually sparked any type of substantive, organic, growth or simply inflated asset prices, and pulled forward future consumption, for a short term positive effect with negative long term consequences? The 4 panel chart below shows the annual changes of real GDP, employment, industrial production, and personal consumption expenditures. I have noted the beginning and end of the 3 different "QE" programs.
As you can see during the first round of Quantitative Easing, which was also combined with a variety of artificial stimulus, bailout and support programs, the economy got a sharp boost from extremely depressed levels. The influx of liquidity stabilized the economy and production levels recovered. However, it is clear that after that initial boost, subsequent programs have done little other than to stabilize the economy while flooding the asset markets with liquidity. As shown, even with these programs in play, the current annualized growth trends of the data are showing clear deterioration. This puts the Federal Reserve in a difficult position of trying to exit support as the economy weakens.
David Rosenberg, in his recent missive, made 5 excellent observations about these diminishing effects of QE programs.
"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!"
For the Federal Reserve it is highly unlikely that a single data point of inflation, or employment, is going to affect their current monetary policy stance. However, the real issue is that IF the recent negative trends in consumption, employment and inflationary pressures do not start to reverse it is highly likely that the Fed will not be able to extract the monetary supports anytime soon. The recent increases in interest rates, combined with still very weak wage growth, higher costs of living and still elevated unemployment is likely to keep the Fed engaged for the foreseeable future as any attempt to remove its "invisible hand" is likely to result in unexpected instability in the financial markets and economy.