Dallas Fed President Richard Fisher, gave a speech to the Asia Society Hong Kong Center last week (read the full text here) where he laid out the glaring concerns and reasons for why the Fed’s QE policies are now in retreat and on track to end by October of this year. In Fisher’s words:
- By buying copious quantities of longer-term U.S. Treasury bonds and mortgage-backed securities (MBS), our balance sheet has grown from slightly under $900 billion prior to the crisis to $4.3 trillion at present
- Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.
- The price – to-earnings (PE) ratio of stocks is among the highest decile of reported values since 1881. Bob Shiller’s inflation- adjusted PE ratio reached 26 this week as the Standard & Poor’s 500 hit yet another record high. For context, the measure hit 30 before Black Tuesday in 1929 and reached an all-time high of 44 before the dot -com implosion at the end of 1999.
- Since bottoming out five years ago, the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent— the highest reading since the record was set in March 2000.
- Margin debt has been setting historic highs for several months running and, according to data released by the New York Stock Exchange on Monday, now stands at $466 billion.
- Junk-bond yields have declined below 5.5 percent, nearing record low.
- Covenant-lite lending is becoming more widespread.
- In my Federal Reserve District, 96 percent of which is the booming economy of Texas, bankers are reporting that money center banks are lending on terms that are increasingly imprudent.
- At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.
In other words, “we now interrupt the QE (and HFT-driven) mirage of robust investment markets and return you to the reality of the business cycle….bonne chance.”
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