Gargantuan tsunami of liquidity

David Rosenberg, Chief Economist and Strategist of Gluskin Sheff + Associates, and Sam Zell, Chairman of Equity Group Investments and one of the savviest real estate and vulture investors of all time, appeared recently on CNBC with Maria Bartiromo. Below are some excerpts (with emphasis added):

MB: David, you’ve been bearish, and now you say even you are bullish.

DR: I didn’t say that I was necessarily bullish. What I did say was an acknowledgement of what’s driving this market. It’s interesting that all the discussion is about how this rally has continued after the lousy ISM’s we have had, the lousy jobs number, the lousy NFIB report that we got yesterday. And, of course, the flip side, since bad news is good news, is that the Fed is going to pump more liquidity into the market for a longer period of time. And it’s not odd that Japan and the US are the leaders. They are the only two countries that are embarking on this gargantuan quantitative easing that is really the lynchpin behind what’s happening in the stock market. So, it’s not about if somebody’s bearish, or somebody’s bullish, or whether you’re agnostic. It’s really about understanding what the principal driver of this market is. It’s clearly not the economy, and it’s clearly not earnings. It is the mother of all liquidity driven rallies that I’ve seen in my lifetime. And it’s continuing.

SZ: What we’re doing is debasing our currencies around the world. … If you reduce the value of the currency, you are going to reduce its buying power and ultimately that translates into a lot of inflation. … What we’re seeing here is a giant tsunami of liquidity, but I don’t know if that necessarily means that things are better. … I think this is a very treacherous market. … In our businesses, we’re definitely not seeing overly strong conditions. We’re seeing a lot of uncertainty, leading to people deferring decisions. This feels like the housing market of 2006: everybody can’t afford to miss it. … We are suffering through another irrational exuberance.

A gargantuan tsunami of liquidity, the mother of all liquidity driven rallies, and yet things in the real economy are not getting any better. This is precisely the argument that David Stockman made in his recent book. As Stockman writes:

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

So, Main Street languishes while Wall Street soars to irrational heights on the back of a Fed driven rally. This is the vindication of Keynesianism that Paul Krugman trumpets?