When looking at the current health of world stock markets, it is critical that we bear in mind the structural paradigm in which we observe: the only reason the financial system remains in place and markets are “healthy” is the vast amounts of government and central bank support. The title to this post comes from Richard Fisher President of the Federal Reserve Bank of Dallas: He also makes the following comments:
I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.
Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery. I personally see no need to administer additional doses unless the patient goes into postoperative decline. I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.
I would also refer readers to the pointed comments of John Hussman in his recent weekly commentary: “Warning: A New Who’s Who of Awful Times to Invest”
We remain in some kind of absurd moment, a belief in a reality which used to exist and shape investment returns, but which in my mind we no longer inhabit. It is worthwhile just referring to the Japanese experience of long term debt deleveraging and aging population in a world which from 1990 to 2007 could hardly be considered pedestrian in terms of global growth. Yet at the present moment in time many of our global economies are heavily in debt, set on a path of deleveraging amidst a demographic shift towards the elderly with no strong overall growth paradigm supporting the transition.
And a thank you to Zero Hedge for alerting me to the existence of the Richard Fisher article.