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Kass: QE's Growing Impotence

Stocks in this article: SPY

This column originally appeared on Real Money Pro at 7:45 a.m. EDT on July 23.

NEW YORK ( Real Money) --

The massive rally in in the U.S. stock market has increasingly ignored that quantitative easing has become an ineffective stimulant to domestic economic growth.

Second-quarter 2013 real GDP now looks to be under +1%, well below expectations when the quarter started. This follows only +0.4% in fourth quarter 2012 and +1.8% in first quarter 2013 -- both of which were well under forecasts as well. In nominal terms, the GDP growth rate will likely drop from +3% in first quarter 2013 to +2% in second quarter 2013.

As a result of weak nominal GDP, sales growth in both the first and second quarter of this year has been nonexistent.

Second-half growth expectations for the domestic economy (as well as the forecast by the Fed) remain in the area of +2%. Recent economic data suggest that these projections may also fall short.

Optimistic second-half forecasts incorporate the view that fiscal drag is receding, job growth is improving, the wealth effect should take hold (and trickle down) and that the U.S. housing market will continue to strengthen. As a friend reminded me, putting aside the fact that the consensus and the Fed always seem to be forecasting an acceleration that never seems to materialize, I am less certain that fiscal drag will moderate and that the housing recovery will continue to be strong.

Moreover, a favorable analysis of the jobs market fails to take into account the rising percentage of part-time (and low-paying) jobs and a generally anemic wage growth outlook. As well, the trickle-down theory fails to recognize that this effect is far less important than the income effect on overall spending. With the personal savings rate at a five-year low, it is unlikely that personal consumption expenditures will be strong enough to generate inventory rebuilding at the corporate level and, thus, a virtuous or self-sustaining economic cycle.

Of course, second-half projections also have to incorporate the non-U.S. picture. Unfortunately, the global economy still lacks an engine for meaningful recovery. China may no longer be the engine of growth that it has been in the past, and the eurozone's economy remains strained.

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