Yesterday the Federal Reserve unleashed more quantitative easing on the American economy. The S&P 500 jumped by 1.6% in reaction to the new policy. Investors are fixated on central bank money printing because they are hoping for another short-term boost to asset prices that have been a hallmark of past money printing episodes. But hope isn’t a strategy. Those investors clamoring for more stimulus are ignoring the limited efficacy of money printing.
The global economy doesn’t suffer from a shortage of liquidity. America’s financial system is drowning in liquidity, yet U.S. economic momentum continues to slow. Our chart of the rate of change in new orders for capital goods shows that economic momentum is slowing. Capital goods orders are a leading indicator of investment in equipment and software—one of the major cyclical components of GDP. If equipment and software investment turns down, broader measures of GDP, and more importantly for stock market investors, corporate profits, are also likely to tumble. The ugly truth is that another dose of Fed liquidity will do little to improve economic growth.
Fed stimulus programs are completely distorting the market’s perception of economic fundamentals. This morning the industrial production report for August indicated a decline in yearly production of 1.2%. Meanwhile, the market continues to rally in light of the Fed’s promise of unlimited money printing until the economy grows.