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Tuesday, January 05, 2016 3:05 PM

Former Dallas Fed President Richard Fisher Goes to Squawk Box Confessional: "We Frontloaded a Tremendous Market Rally"; Transcript of Video

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Fed governors sometimes tell the truth, but generally only after they leave office, and always after the damage has been done.

In that regard, former Dallas Fed president Richard Fisher admits "We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."

The embedded video will not play in-line, but you can view it on You-Tube by clicking a second time on the notice.

Partial Transcript

Fisher: What the Fed did, and I was part of that group, we frontloaded  a tremendous market rally starting in march of 2009. It was sort of a reverse Wimpy factor. Give me two hamburgers today for one tomorrow. We had a tremendous rally and I think there's a great digestive period that's likely to take place now. And it may continue. Once again, we frontloaded, at the federal reserve, an enormous rally in order to accomplish a wealth effect. I would not blame this [the 2016 selloff] on China. We are always looking for excuses. China is going through a transition that will take a while to correct itself. But what's news there? There's no news there.

Squawk Box: I guess the question Richard is: How ugly will it get? If you do see this big unwind of Fed Policy which fueled a 6 and one-half year bull market, what does it look like on the way down?

Fisher: Well, I was warning my colleagues, don't go [inaudible] if we have a 10-20% correction at some point. ... These markets are heavily priced. They are trading at 19 and a half time earnings without having top line growth you would like to have. We are late in the cycle. These are richly priced. They are not cheap. .... I could see a significant downside. I could also see a flat market for quite some time, digesting that enormous return the Fed engineered for six years.

Squawk Box: Richard, this digestive period, does it usher in an era where assets can't perform in the absence of accommodation?

Fisher: Well, first of all, I don't think there can be much more accommodation. The Federal Reserve is a giant weapon that has no ammunition left. What I do worry about is: It was the Fed, the Fed, the Fed, the Fed for half of my tenure there, which is a decade. Everybody was looking for the Fed to float all boats. In my opinion, they got lazy. Now we go back to fundamental analysis, the kind of work that used to be done, analyzing whether or not a company truly on its own, going to grow its bottom line and be priced accordingly, not expect the Fed tide to lift all boats. When the tide recedes we're going to see who's wearing a bathing suit and who's not. We are beginning to see that. You saw that in junk last year. You also saw it even in the midcaps, and the S&P stripped of its dividends. The only asset that really returned anything last year, again if you take away dividends, believe it or not, was cash at 0.1%. That's a very unusual circumstance.

Squawk Box: Richard. This has been an absolutely extraordinary interview. For you to come on here and say "I was one of the central bankers who engineered the frontloading of the banks, we did it to create a wealth effect" and then you go on and tell us, with a big smile on your face that we are overpriced, which is the word that you used, and there would be some digestive problems,  are you going to take the rap if there is a serious correction in this market? Will you equally come on and say "I'm really sorry we overinflated the market", which is a logical conclusion from what you've said so far in this interview.

Fisher: First of all I wouldn't say that. I voted against QE3. But there's a reason for doing this. Let's be fair to the central banks. We had a horrible crisis. We had to pull it out. All of us unanimously supported that initial move under Ben Bernanke. But in my opinion we went  one step too far, which is QE3. By March 2009 we had already bought a trillion dollars of securities and the market turned that week. To me, personally, as a member of the FOMC, that was sufficient. We had launched a rocket.  And yet we piled on with QE3, but the majority understandably worried we might slide backwards. I think you have to be careful here and frank about what drove the markets. Look at all the interviews over the last many years since we started the QE program. It was the Fed, the Fed, the Fed, the European central bank, the Japanese central bank, and what are the Chinese doing?  All quantitative easing driven by central bank activity. That's not the way markets should be working.  They should be working on their own animal spirits, but they were juiced up by the central banks, including the federal reserve,  even as some of us would not support QE3.

Mish Comments

Finally, but too late, we have a frank admission by a Fed president explicitly stating some things that needed to be said.

  • The markets are seriously overvalued 
  • The Fed purposely sponsored bubbles, specifically for the wealth effect

So here we are, back with another enormous bubble,  on purpose, with the economy clearly weakening again.

The wealth effect primarily benefited the already wealthy, at the expense of everyone else. In the process, corporations are more debt-leveraged than ever before, and houses are not affordable for those most in need of buying them.

The process was entirely counterproductive, especially from QE3 on.

Mike "Mish" Shedlock

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