All articles 187

10 16 2015 | by Victor Xing | Central Banks

What are negative effects from the FED’s “ultra-expansionary monetary policy”

There are negative effects from prolonged “ultra-expansionary monetary policy” (one of FED Vice Chair Stanley Fischer’s famous sayings).  Some investors also like to call it economic distortions as a result of financial repression.

  1. Former FED Governor Jeremy Stein made a case that low short-term interest rates are pushing investors traditionally active in that sector further out of the yield curve, thus taking more duration risk.  In his view, this constitutes as a form of financial stability risk [speech text].  My perspective is that many investors also increased leverage in order to achieve higher outright returns (not adjusted for risk)
  2. Low borrowing cost induce risky behaviors such as issuing debt to buy back stocks.  We’ve seen this on the trading desk on a daily basis, and it was just mind boggling.  Due to lower growth, many companies also opted to creating synthetic growth via debt-funded M&A  [Bonds for Buybacks Never Bigger in U.S. as $58 Billion Sold]
  3. A number of investors argued that the U.S. Shale Revolution was largely made possible by cheap High Yield borrowing, which subsequently pushed down prices of oil and sent shock-wave through the financial sector and the real economy.  The investors also argued that these investments effectively constituted asmalinvestment, spurred by desperate investors “reaching for yield.”  I also wrote about this in my answer to “Is the mining and resources boom about to move into the next phase of growth, or are we headed for a world recession for many years?”HY ex-energy vs. HY energy chart from WAMCO’s Oil and High-Yield Energy Brief
    High yield bonds have recently weakened following years of ultra-expansionary monetary policy
    High yield bonds have recently weakened following years of ultra-expansionary monetary policy
  4. Cheap financing and the post-08 housing market also facilitated other anomalies such as: Wall Street Is My Landlord.
  5. Greenspan FED’s policies post dot-com and 9/11 laid the groundwork for further reflationary distortions and sector-specific asset price inflation.  In the spirit of his focus on housing, below is a chart showing rental inflation (Owner Equivalent Rent) on a YoY basis vs. headline inflation (weighed down by energy and China import prices).  Rental inflation is running at pretty staggering 3.09% YoY
    Ultra-expansionary monetary policy managed to offset the significant private sector deleveraging, but the reflationary effect had been concentrated in the asset markets (housing sector)
    Ultra-expansionary monetary policy managed to offset the significant private sector deleveraging, but the reflationary effect had been concentrated in the asset markets (housing sector)

Next article10 15 2015 | by Victor Xing | Central Banks

Does the European Central Bank replace the functions of Eurozone national central banks?