Roubini : QE3 Not nearly as Effective as QE1 & QE2

Nouriel Roubini | Transmission trouble for QE3

QE3 reduces the tail risk of contraction but is unlikely to lead to a sustained recovery in the US
By Nouriel Roubini :
The US Federal Reserve’s decision to undertake a third round of quantitative easing, or QE3, has raised three important questions. Will QE3 jump-start the US’s anaemic economic growth? Will it lead to a persistent increase in risky assets, especially in the US and other global equity markets? Finally, will its effects on gross domestic product (GDP) growth and equity markets be similar or different? Many now argue that QE3’s effect on risky assets should be as powerful, if not more so, than that of QE1, QE2, and “Operation Twist”, the Fed’s earlier bond-purchase programme. After all, while the previous rounds of US monetary easing have been associated with a persistent increase in equity prices, the size and duration of QE3 are more substantial. But, despite the Fed’s impressive commitment to aggressive monetary easing, its effects on the real economy and on US equities could well be smaller and more fleeting than those of previous QE rounds. Consider, first, that the previous QE rounds came at times of much lower equity valuations and earnings. In March 2009, the S&P 500 index was down to 660, earnings per share (EPS) of US companies and banks had sunk to a financial-crisis low, and price/earnings ratios were in the single digits. Today, the S&P 500 is more than 100% higher (hovering near 1,430), the average EPS is close to $100, and P/E ratios are above 14. Even during QE2, in the summer of 2010, the S&P 500, P/E ratios, and EPS were much lower than they are today. If, as is likely, economic growth in the US remains anaemic in spite of QE3, top-line revenues and bottom-line earnings will turn south, with negative effects on equity valuations. Moreover, fiscal support is absent this time: QE1 and QE2 helped to prevent a deeper recession and avoid a double dip, respectively, because each was associated with a significant fiscal stimulus. - in project syndicate source : >>>>