GDP data reveal Fed failure

Stalling economic growth, in the context of a surge of cheap money, demonstrates that structural problems remain.

By Anthony Mirhaydari Jun 26, 2013 12:02PM

Investing losses © Colin Anderson/Getty ImagesIt wasn't supposed to be this way. When the Federal Reserve committed to pump $85 billion a month in cheap money into a financial system already awash in trillions in extra cash, it was supposed to boost an economy that had started to languish. It was supposed to reinvigorate the job market, boost business investment, and offset strains in the global financial markets. Economic growth had fallen from 4.1% in late 2011 to 2% in the first quarter of 2012 to 1.3% in the second quarter of 2012.

 

And while financial markets sucked up money like the cheap money addicts they've become, it resulted in only marginal benefits for the average American. Now, just as markets are rattled by the Fed's move towards dialing back its $85 billion a month on concerns over froth and overexcitement in the financial system, the economy has stalled again.

 

Nine months after launching "QE3" it's clear: The Fed actions have been a failure.

 

The GDP growth trend shown in the chart below says it all. And it would've been worse if not for a rise in household spending driven not by an increase in income but by a rise in credit and a drop in the savings rate. If income doesn't rise, the surge of spending will prove unsustainable and drag on growth in the months to come.

Now compare the chart to the surge in the monetary base as QE3 spooled up, which is shown below. Still think cheap money will solve all?

How about in the context of all the recent market volatility -- the dramatic falls in corporate bonds, emerging market stocks, precious metals, Treasury bonds, and the first move below the 50-day moving average for the Dow Jones Industrial Average ($INDU) since 2012 -- because the Fed hinted it could slowly roll back its bond purchase rate by a mere $10 or $20 billion?

 

All of this illustrates a point I've been making for months: The cost of money isn't what's holding back this economy. It's deeper, structural problems in desperate need of reform. Such as an inefficient tax code that discourages small- and mid-size businesses. It's a regulatory burden that's only going to grow with new climate change legislation and the rollout of Obamacare. It is dilapidated infrastructure and overly lax trade policy that doesn't punish China for its intellectual property theft.

 

The result is a lack of business investment in new machinery and new workers, which in turn is pulling down the economy's ability to grow.

 

Stocks are rebounding as weaker GDP growth makes it more likely the Fed keeps the stimulus taps wide open. But investors are ignoring the darker, deeper truth: The Fed, after five years of 0% interest rates and a near $2.5 trillion expansion of the monetary base (from just $800 billion before the recession), can no longer juice the economy.

 

I'm keeping the focus on short-side opportunities such as homebuilders like DR Horton (DHI) and material stocks like Alcoa (AA) -- both of which are in my Edge Letter Sample Portfolio

 

Disclosure: Anthony has recommended AA short to his clients.



Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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79Comments
Jun 26, 2013 1:43PM
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The problem with QE I, II and III was the money never made it to consumers that work for a living.

Instead the money went to enable the massive deficit spending of the democrats and Obama to buy votes.   Well now comes the hangover....

Ben could have sent every family in America a $1000 a month for the last 2 years in the form of a tax cut.  That would have ended this recession.  Instead the imbecile Obama now wants to send every family in America a massive tax bill to pay for all his spending.  

17 trillion divided by 80 million households, means every family now owes 212,500...  Please send in your checks today.   That's up from 127,500 from when he took office.

DID YOU GET YOUR CHECK for $85,000?   IF NOT, ASK THE DEMOCRATS FOR YOUR FAIR SHARE!
Jun 26, 2013 12:29PM
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What did we think would happen when big banks are given free money with no strings attached? Did we think they would benevolently trickle it down to main street when the easy money was to be made in commodity speculation? QE1, 2, and 3 was not about stimulating the economy, it was about keeping big banks solvent and financing $4 trillion in new Obama debt at cheap rates.

 

Coming out of the worst recession since the 1930's, demand for virtually everything is still down, yet we have some of the highest gasoline prices on record, rising prices in food, clothing, metals, etc., all fueled by commodity speculation and a weak dollar brought about by excess cash.

 

Supply/demand is broken thanks to Mr. Bernanke. $4 gas would be $2.80 were it not for the 30-40% added on by big bank commodity speculators. Same with Corn, coffee, copper, etc. etc.

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I am Republican, but am Conservative, leaning toward Tea Party. All these designations and labels confuse the voters to one side or another. We need to finally get the big government back under control. Wheather it was Reagan, Bush, Obama, Carter-it doesnt matter!

There needs to be a movement for bringing down government, those that work for US, to a manageable level. No one Repub or Democrat can OR WILL make the gov smaller. This has got to change people.

The only party, movement is the Tea Party that I can see who demands fiscal reform. If there is another party, maybe left leaning, tell us. Let's get these types of politicans in office.

Jun 26, 2013 12:38PM
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Autos are up but so are delinquent payments on those autos.Everyone here complains about how the banks  aren't lending to prospective home buyers but I'm here to say they're not lending to unqualified borrowers UNLIKE the Autos.

Jun 26, 2013 2:05PM
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Generaly don't agree with Anthony but I think the point he was trying to make here was, rather than the ill conceived QE Progams perhaps Obama should have been focused on reform that would have given small business and prospective new home owners a better chance or perhaps a blend of the two. Just my nickels worth. Oh I mean .02 forgot there is no inflation.

Jun 26, 2013 1:56PM
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Well, GDP can't grow to the moon.  At least it's not negative.  I'm no economist, but considering that we don't manufacture much of anything in this country anymore and that much of corporate revenues comes from services, con artistry and financial shennanigans, it is amazing that we're doing as well as we are.  Stimulating BS is what we're doing, not stimulating a real economy.
Jun 26, 2013 1:55PM
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Don't you think at this point that the man- Bernanke is the least of our concerns? He was the arrogant data-believing agent of the destruction. The scheme was concocted by Inflationists and it's about time to get those cockroaches out in the open. There is more than $1 quadrillion in currencies, derivatives and debt instruments to wash, rinse, compromise and seek not to repeat.  
Jun 26, 2013 3:29PM
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Vinnie - don't put Regan in the same sentence with Obuma and Carter and Bush.
Reagan CREATED jobs, millions in his first year. and - he really, really did inherit a mess from Clueless Carter.
Think rates are going to get high soon ?
How about 21% interest rates ?
My first Mortgage was 16% !!!
Not 1.6 % ----16%
Think about that.
Gas lines , gas days when only even or odd number plates got gas, long lines
Home prices skyrocketing
Unemployment at 5% (wouldn't we LOVE that now ?)
Regan got all that crap resolved in his first year. To put Regan and Obuma in the same sentence is laughable, you obviously weren't around during Carter /Regan

Jun 26, 2013 3:57PM
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The 3 biggest years for tax receipts-were from Bush Tax Cut Policy years where EVERYONE received tax Cuts and more people in history didn't even pay FEDERAL income tax. Go Figure.  I think if I remember 2007,2008 and now 2012 ALL Bush Tax Policy Years. Government is just spending too much. And all this money that the big boys are claimed to be  hiding on top of low rates ,I sure hope for the left that Tax Receipts are far higher in 2013 than they were for 2012 with the tax increase placed on the Rich,
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ROFL

 

pumping money into the hands of the super rich will not make main street any better

 

we have been down this road before in the Great Depression.

 

We are now in the Greater Depression as the middle class has been turned into the poor class and the rich class has become the super rich class.

 

Pretty much the US economy is doomed to collapse as they are not supporting the people rather the super rich.

 

Same mistake they made in the Great Depression

 

It was only when Hilter threatened to wipe out the Wall Street bankers that they opened their pockets and hired Americans to fight inthe war and build weapons for the war. That small thing lasted about 50 years but now it's over and we are back in a Great Depression.

 

They know how to make this country great but they choose to put us the middle class into the poor class

Jun 26, 2013 7:01PM
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Fed FAILURE ? The Fed is a criminal organization preying on the small middle class investors ! The collapse is coming Fed cannot keep it's PONZI scheme going ! Consumer is dead no money no jobs no spending ! Here comes the collapse ! TAKE YOUR MONEY AND RUN BEFORE IT IS TO LATE !
Jun 26, 2013 2:12PM
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Close the Banks. End the Federal Reserve. Get RID of Wall Street. Segregate, reconcile, regulate and supervise. It's our currency, when all it does is fuel corruption, time to crash, smash it, trash it and get a new form of it to the people who ARE the economy. Eat the rich, they are tender and don't recover jobs.
Jun 26, 2013 6:26PM
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Consumer purchasing power is growing very slowly if at all. Inflation reduces consumer purchasing power. The fed has no choice but to control inflation. We may see real inflation below 0% in the future. In fact a little deflation would actually improve employment.
Jun 26, 2013 3:04PM
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It was never a case of "failure to communicate" by the Fed.  It was a case of not having the right solution to the financial problem.  Wall Street types were like zombies main lining heroine with cheap money.  But you can not help those people when they are brain dead to begin with.  Now you can hear them out there on the trading floor.  "We need drugs!  We need cheap money."  Give us what we want or we crash the market.

Give me a break!!!!

Better yet, give me a workable solution  to this mess.

Jun 26, 2013 5:26PM
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Hmmmm, Aunt (have a) Merryday has two articles up...

And Mirage has got his panties in a bunch, trying to keep up with him..

 

C'mon Miragy you have even admitted several times you were holding back just as  Mirhaydari has stated....You and many others are "not trying" to turn America around...

 

You are only worried about your pocket and trying to get Democrats out of office...Remember.?

Also part of the reason you moved away from Chi...

To eliminate a few taxes and hire "cheaper" help down in Texas....

We have been in a couple businesses and we dealt with what we had, and never thought about running from any obligations....Did consider moving further South for our Horse/Cattle/Hog operation, but wasn't really worth the trouble in the long run...You might say we settled.

And going to a Club to have a drink then pick up some fertilizer/lime....Have a nice night.

Jun 26, 2013 3:46PM
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Anthony is right about structural issues, and the monetary base (bank reserves and currency) has grown to a large number as expected with all the bond buying by the Fed. First quarter GDP was revised to 1.8% which was a disappointment, but the market is doing OK today. Why? Because the market is always forward looking.

With all the crappy numbers, there have been some positive ones too like home sales. In the early stages of any economic recovery, the data is always mixed. 

I don't think the economy will stall out, but I think the politicians are very much on edge afraid it will. I expect that this might give them some impetus to do something positive for it. If we get back into a recession, there will be some tarrin' and featherin' going on down there in Washington.

Har har har me mateys ye best bring our vessel into the wind!
Jun 26, 2013 5:01PM
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I think what the author is saying about "structural forces" is what we economists call fiscal policy. There is a structural crisis in which most of the income gains go to the top 1% and corporations; real income per worker continues to drop; roughly 20 million Americans cannot fulltime work.  There cannot be effective demand for goods and services in the U.S. if the top 1% get 20% or more of all income and nearly 100% of all capital gains and returns to capital.  The working and middle class can no longer go into unsustainable debt, so guess what we are in a long-term recession with no end in sight.

 

 The Obama fiscal stimulus was not large enough to boost the economy when it went into effect in 2009, but it did have a positive effect that complemented the Fed's cheap money policy.  Many mainstream economists in early 2009 indicated that the Obama stimulus would not get economic growth up to take off range, and reduce unemployment back to levels below 6 percent.

 

Then the Republicans won the House of Representatives in 2010 and have throttled back fiscal stimulus every year, including threatening to default on the U.S. Government debt.  Their sequestration in 2013 will drop at least 1 percentage point off GDP growth.

 

I blame the lack of a much larger fiscal stimulus to boost the economy.  If the unemployment rate was well below 6% and falling, the Fed would kick up interest rates to more normal rates.

Jun 26, 2013 4:52PM
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The problem with QE I, II, and III is that it mostly stayed with Big Corporations. Then you have folks like MG claiming otherwise. Fact is, when Corporations are recording Record Profits and Cash Hoards, they normal do the right thing and invest in their workers and build plants here. Now as more and more folks talk as MG, Corporations feel empowered to not reward workers anymore. CEOs can reward themselves for doing next to nothing but dam anyone else.

MG says asks Democrats for your share but as per usual says very little about the corrupt Republicans that caused the Great Recession. That's right sheep, your push for little or no Regulations caused this. With sound rules, this never happens. So you reap what YOU Sow and everyone else suffers. Yet of course you Blame anyone and everyone but yourselves. Typical.

Jun 26, 2013 3:56PM
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Mrs Fat Pussy" giving advise ?
LOL This Asian turd is a total fraud , fake
No Fat Cat , shops in Wal-Mart for food or anything else . buys the wanna be , I got a BMW , ONE series !
That's for broke , teenagers. LOL
Listen to this dumb gookie and you end up like him.
The dumbest Asian on the planet driving the "One" series meant for teenage girls !
AHHHHSOOOOOOOOO
OOUCH

Jun 26, 2013 1:31PM
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Nine months after launching "QE3" it's clear: The Fed actions have been a failure

 

That's a totally dumb unfounded statement. The author has no clue how bad it might have been if the FED had told business and consumers to screw themselves. No QE's didn't create a economy that's booming but the did stabilize an economy that could've tanked into a depression. But the funny thing is some smart money types think they can start raising interest rates now. We're 3-5 years from interest rates going back to 3-4% so you better invest in something other than fiat dollars. The Great Recession destroyed $20 trillion in credit and the Fed's lousy $3 trillion balance sheet  isn't going to fix it.

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