It's an irrefutable fact that the Law of Diminishing Returns has been applied — and has been proven — to affect everything from factories to fields and, lately, the Federal Reserve, as well. This, as the central bank mulls over whether or not more stimulus is needed to boost the faltering U.S. economy, and if so, whether it would even work.
"You're reaching the limits of what monetary policy can do for the overall economy," says Jason Trennert, Chief Investment Strategist at Strategas Research Partners, in the attached video. "So I still think you're going to get something from the Fed, I just don't think it's going to be all that effective."
QE Returns
Strategas research shows that S&P 500 gains have clearly dwindled over time, going from 80% during QE1 to 33% in QE2 to 26% from QE3. While diminishing returns (or getting less bang for your buck) is never a good thing, Trennert is of the mind that a further reduction in rates — by any means — will n0t address the underlying problem.
"If you look at interest rates, that's not the impediment to economic growth," Trennert says. "Congress and the Obama administration are much more culpable, especially since they're creating an environment where you don't know what the rules are."
While he concedes that another round of easing (or QE3, if you will) would undoubtedly help the market, at some point investors will demand real economic growth and fiscal progress, rather than a batch of voodoo whipped up by an already overextended Fed.
"Bernanke's been at work. He's practically quadrupled the size of the Fed's balance sheet," Trennert points out, reiterating the Fed Chief's own call that it's high time that Congress carry its fair share of the load and get serious about fiscal reform.
His advice is two-fold. If you're a trader, "start positioning now" ahead of an "imminent" round of additional stimulus. But for longer-term investors, Trennert urges more caution, since the lead up to and reaction from more money printing will be a very hard thing to time.
