Stewart Richardson, CIO of RMG Wealth Management, based in London, says there is evidence the FOMC at the US Federal Reserve is starting to split apart over the application of further QE measures.
Richard Fisher citing a Duke University poll of 887 CFOs – “CFOs believe that a monetary action would not be particularly effective. Ninety-one percent of firms say that they would not change their investment plans even if interest rates dropped by 1 percent, and 84 percent say that they would not change investment plans if interest rates dropped by 2 percent”
Incredibly, it seems that the academics on the FOMC think they know better than corporate managers – “Citing these observations, I suggested last week that the committee might consider the efficacy of further monetary accommodation. When I raised this point inside the Fed and in public speeches, some suggested that perhaps my corporate contacts were “not sophisticated” in the workings of monetary policy and could not see the whole picture from their vantage point. True. But final demand does not spring from thin air. “Sophisticated” or not, these business operators are the target of our policy initiatives: You cannot have consumption and growth in final demand without income growth; you cannot grow income without job creation; you cannot create jobs unless those who have the capacity to hire people-private sector employers-go out and hire.” (RMG comment – The problem with academics that have devoted much time and energy toone thesis is that they often struggle to see past their endeavours, even when the evidence builds that they may actually be making a bad situation worse).
Richard Fisher on research that questions current central bank policies – “And as for Bill White-a globally respected economist who stood up to convention and predicted in 2003 that policies being pursued at the time would engender the financial crisis of 2008-09-here is what he wrote in a particularly thought-provoking paper a week before the Fed’s annual symposium last month at Jackson Hole.”
Quote from William White’s paper – “It is also argued… that, over time, easy monetary policies threaten the health of financial institutions and the functioning of financial markets, which are increasingly intertwined. This provides another negative feedback loop to threaten growth. Further, such policies threaten the ‘independence’ of central banks, and can encourage imprudent behavior on the part of governments. In effect, easy monetary policies can lead to moral hazard on a grand scale. Further, once on such a path, ‘exit’ becomes extremely difficult. Finally, easy monetary policy also has distributional effects, favoring debtors over creditors and the senior management of banks in particular. None of these ‘unintended consequences’ could be remotely described as desirable.”
Richard Fisher on how politicians are a major part of the problem – “One of the most important lessons learned during the economic recovery is that there is a limit to what monetary policy alone can achieve. The responsibility for stimulating economic growth must be shared with fiscal policy. Ironically, and sadly, Congress is doing nothing to incent job creators to use the copious liquidity the Federal Reserve has provided. Indeed, it is doing everything to discourage job creation. Small wonder that the respondents to my own inquires and the NFIB and Duke University surveys are in “stall” or “Velcro” mode.”
“If only the fiscal authorities could do the same! Instead, they fight, bicker and do nothing but sail about aimlessly, debauching the nation’s income statement and balance sheet with spending programs they never figure out how to finance. ” (RMG comment – Wow! This is a central banker talking about what politicians are doing to the US’ finances. It could be equally applicable to most Western democracies.)
Richard Fisher on a recent exchange between Ben Bernanke and Senator Chuck Shumer when the Senator told the FED to get printing – “No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum ; get on with it. Sacrifice your political ambition for the good of our country-for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught.” In hypothetical response to Senator Chuck Shumer. (RMG comment – The era of ever increasing government expenditure has probably met its nadir, but QE is postponing that reality, allowing politicians to delay taking tough decisions on tackling budget deficits).
We think that Richard Fisher has hit the nail on the head. We strongly believe, as does Mr Fisher, that QE does not benefit the economy and the costs are potentially enormous. QE will end badly, we just do not know when or indeed how – this depends on the future actions of central bankers and politicians. Either way, investing in markets that have been propelled higher primarilyby central banks is a riskyinvestment strategy, and great care needs to be taken. Although we are not too worried about the next 1 to 4 months, we do believe that within say 12 months (probably less), markets will suffer a real shakeout.