Nouriel Roubini: Transmission trouble for QE3

The chairman of Roubini Global Economics, professor of economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics Nouriel Roubini shared his thoughts in Wall Street Journal that, QE3 reduces the tail risk of contraction but is unlikely to lead to a sustained recovery in the US. 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.

Even if the US avoids the full fiscal cliff of 4.5% of GDP that is looming at the end of the year, it is highly likely that a fiscal drag amounting to 1.5% of GDP will hit the economy in 2013. With the US economy currently growing at a 1.6% annual rate, a fiscal drag of even 1% implies near-stagnation in 2013, though a modest recovery in housing and manufacturing, together with QE3, should keep US growth at about its current level in 2013.

Roubini: If Jobs Number Is Weak, the third round of quantitative easing on Its Way

American economist Nouriel Roubini expressed his pessimistic view about U.S. and explained that he expects a further round of quantitative easing from the Federal Reserve in December. The founder of Roubini Global Economics shared his point of view in an interview for CNBC and added that if today’s jobs number is ok then the Fed can wait to do QE3.

"Yet the economy is weak enough and the unemployment rate weak enough that the Fed is going to do QE3 eventually.", said Roubini.

As he accepted the Democratic Party’s nomination to seek a second term as President, Barak Obama asked for more time to help solve the U.S.’s economic problems. He insisted that the problems of slowing growth are solvable and it is just a matter of time things to go back to normal.

"By the fourth quarter, with the fiscal cliff coming and firms becoming more cautious, capital spending is slowing down and growth will be not even 2 percent," warned Roubini. "Job creation might be around 100,000 or slightly higher for the next few months, but there’s not going to be any significant reduction in the unemployment rate."

He argued that with gross domestic product (GDP) growth of around 1 percent to 2 percent, the fiscal drag may weigh down the economy and predicted growth of close to 2 percent for the third quarter. Roubini believes that it will then slow in the last three months of 2012.

"If you get the fiscal drag as growth slows, you’re close to zero growth next year", he said. "This implies that by December the Fed is going to do a third round of QE3."