“No amount of monetary easing is going to get things going.”
“I think the bar (for QE3) is pretty high. The efficacy, from an economic standpoint, of the last round was minimal… At a certain point if things were to get really, really ugly the Fed would do it again, but I think things would have to get really ugly because they understand their diminishing marginal returns to the psychology of monetary accommodation.”
(Sidenote: This week Bernanke hinted that there might be a QE3. At least one influential economic policy rule says we should. And Nancy Pelosi said yesterday that Republicans would have to see a 500 drop in the market for QE3.)
The reason he’s so bearish goes back to the mortgage crisis, which the housing market hasn’t recovered from. His argument is interesting because he explains why the wealth effect isn’t working. He says normally, the wealth effect works. But right now it’s not, and it won’t – because of the depressed housing market.
People “still subscribe to the notion that if you just free-up resources for the private sector, the private sector will figure out how to grow. That’s normally the case 95% of the time,” EXCEPT when “households are deleveraging.”
Very simply: we all have too much debt still.
“Households have too much debt and until they get out from under that debt, demand is not going to come back. And only when demand comes back will companies start to invest again. The reality is, the demand is not there.”
The answer: keep spending.
“The only one spending right now is the government. If they cut too dramatically than aggregate demand will decline precipitously and then everyone gets in trouble again.”
Here’s what we know about Dow:
- Before Pharo, he was a portfolio manager at MFS Investment Management, where he ran an emerging markets debt portfolio
- Formerly a specialist in debt sustainability analysis at the US Department of the Treasury
- Formerly an economist at the IMF
- Ph.D. from Tuft’s Fletcher School ’90
- Now he works as a Senior Portfolio manager at Pharo, a ~3.5 billion (AUM) emerging markets fund
- He has commented on just about every big market event recently
Watch him on Yahoo!Finance here: