QE at the edge of the cliff?

Taken from David Stockman and Jeff Snider

US manufacturing output growth has stalled since November, and we are  in month 70 of the fake “recovery”. It is 7-1/2 years since the pre-crisis peak, but  at its current plateau, today’s  April number for manufacturing production represents a miserable 0.33% annual rate of growth since December 2007.

Inventory has piled up, and given the recovery cycle is long in the tooth, and there is no trend recovery of manufacturing production, there is little hope it will be used. Exports are faltering, the oilfield boom is over, and the inventory-to-sales charts spell fire-sale “liquidation”.


In the seven-years after the mid-2000 peak, industrial production grew at a 1.7% CAGR—-or at 5 times the rate achieving in the current cycle, while in the ten-years after the 1990 peak, the annual rate of growth was 4.6%. That’s how recoveries performed before QE rammed the economy into the corner of maximum debt.


The recent crazy monetary policy is doing nothing for the real economy.

In this recent quarter total services spending amounted to $7.352 trillion in constant 2009 dollars, but more than $4 trillion of that was accounted for by health care and housing and utilities. But health care is a function of fiscal spending, not the Fed’s QE. Meanwhile, the majority of the $2 trillion spent on housing and utilities represents the “imputed spending” number that  the Commerce Department works out, in other words makes up, for the 75 million homeowners of America. Again the Fed’s QE has no impact here, and certainly not in terms of the vaunted “wealth effects” that the Fed maintains is the conduit for its policies into the real economy.

Just think about it: QE has ballooned the fed’s balance sheet fivefold from $900billion to $4.5 trillion. Meanwhile, the massive services component of GDP has grown from $6.684 trillion in Q4 2007 to $7.352 trillion in the quarter just ended. That’s only a gain of $670 billion and represents a compound annual growth rate of 1.4%, of which $485 billion , or nearly 75%, was down to health care and housing.

The only thing QE did was to stimulate the greatest stock market bubble in history, driving corporate executives to tap the credit markets at virtually no cost because of ZIRP, to the extent of more than $2 trillion in this “recovery” cycle alone—- to buy back their stock. It also becomes self-feeding as stock prices feed into stock options, and the gains to the pockets of the executives create a mystical aura, which convinces them that “escape velocity” must have been reached and leading them to pile up inventories and hire staff.

This is what Snider describes as the effect of the Blue Chip Economic Survey and the call by almost all economists that last year’s bad news was an aberration and that “the sun was going to rise”. This appealed to the “repression fatigue” in businessmen, but it wouldn’t the first time they will have been wrong. The consumer, rammed up again his own corner of the debt space, isn’t going to be able to budge.

Five months worth of falling wholesale sales and soaring business inventories are evidence that a problem lies around the corner. In effect, QE and the talk surrounding it has created unwarranted confidence, while the floor under the market has gradually been eaten away.