Heavyweight hedge fund manager David Einhorn had sharp criticisms for QE3 in his latest quarterly newsletter to his investors.
Einhorn acknowledged the difficulties in the third quarter, including weaker European and Asian economies, slower earnings growth and rising commodity costs.
Yet he warned that stimulus has its limits. Unfortunately, it will be the markets that will reveal those limits to central bankers. Then it will be investors who suffer once an equity bubble is created.
From Einhorn’s letter:
It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy”. … He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.
More importantly, Einhorn expresses concern about what policy levers the Fed may be able to pull if the U.S. economy worsens.
Sooner or later, we will enter another recession. It could come from normal cyclicality, or it could come from an exogenous shock. Either way, when it comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot. What tools will the Fed and the Congress have at that point?
Einhorn is not an alarmist. According to ZeroHedge, the Fed’s balance sheet will increase from about $2.8 trillion in September to $4 billion by year’s end. If and when the Fed attempts to unwind that huge balance sheet in the future, that process is likely to create a drag on GDP.
It also may set the stage for the markets to become ever-more dependent on policy, as opposed to corporate fundamentals.
