STOCK MARKET WATCH -- Tuesday, 27 November 2012

[Demeter]

17. QE Won't Work Because There's No Demand For Credit

http://www.businessinsider.com/qe3-and-bernankes-folly-2012-9

Earlier this year, as the markets were expecting QE3 from one Fed meeting to the next, I was stating another program would not come until September after data for Q2 GDP could be analyzed. However, as we moved into August, and the markets were rallying strongly on"hope" of further balance sheet expansion programs, I moved my estimates out until the end of the year. The reasoning, as I stated, was under the assumption that Bernanke would save his limited ammo for a weaker market/economic environment. Clearly I was wrong.

Much to my surprise, and against all of what seemed logical, Bernanke launched an open ended mortgage backed securities bond buying program for $40 billion a month "until employment begins to show recovery." That key statement is what this entire program hinges on. The focus of the Fed has now shifted away from a concern on inflation to an all out war on employment and ultimately the economy. However, will buying mortgage backed bonds promote real employment, and ultimately economic, growth. Furthermore, will this program continue to support the nascent housing recovery?

Employment - Where's The Demand?

During the Fed's announcement today Bernanke repeated several times that the primary concern of the Fed is now employment. One of the Federal Reserves primary legal mandates is to foster full employment in the economy. However, after two previous Large Scale Asset Purchase programs (QE), and a Maturity Extension Program (Operation Twist - OT), has employment meaningfully recovered.

The chart below shows the net gains in employment since the beginning of 2009 as compared to the number of individuals that have moved into the "No Longer In Labor Force" category where they are no longer counted. There has been an increase of 3.4 million jobs since the lows of mass firings and layoffs post the last recession. That increase is far lower than would have been expected in any normal economic recovery. At the same time, however, more that 8.4 million individuals have just "given up looking for work" or "retired." during the same period. There is NO evidence that bond buying programs have any effect on fostering employment. However, at the current rate of individuals leaving the work force Bernanke could likely get his wish of "full employment" in the next couple of years. Of course, economic prosperity will have deteriorated much further as the rise of the "welfare state" continues.
















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