Market Update – September 24th
This past week, Dallas Fed President Richard Fisher gave a speech on monetary policy. His speeches never disappoint – he’s the best. Here are some of my favorite pieces from this last one. Some are direct quotes and others are my attempts to paraphrase his work.
1. “I believe that with each program we undertake to venture further in that direction [additional monetary accommodation], we are sailing deeper into uncharted waters.
2. “The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course.”
3. “And nobody — in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves.”
4. There is $1.6 trillion in excess private bank reserves, trillions more in corporate coffers and a tremendous amount of underemployed cash in money market funds. “This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy’s boiler when so much is presently lying fallow?”
5. We think that cheap money will lead to higher employment. But, surveys of small and medium size businesses are either not interested in borrowing or have no problem accessing cheap financing if they want it. The primary concerns are regulatory and fiscal uncertainty.
6. Big businesses dominate fixed investment and job-creating capital expenditures. “Most all of these businesses have abundant cash reserves or access to money, many at negative real interest rates.” We’re in stall mode, waiting for the uncertainty of Europe and the U.S. fiscal policy to pass. Further monetary accommodation will simply go to stock repurchases.
7. Duke surveyed 887 CFOs and only 14.5% listed “credit markets / interest rates” among the top three concerns facing their corporations. In contrast, 43% cited consumer demand and 41% cited federal government policies. Next on the list was price pressure from competitors and fourth was global financial instability. Approximately 91% of CFOs said they would not change their investment plans even if interest rates dropped by 1%; 84% said they wouldn’t change their investment plans if rates dropped by 2%.
8. While President Fisher is skeptical, he said that he understands the logic of the FOMC’s recent decision. “The program could help offset some of the drag from higher government-sponsored entities’ fees that have been recently levied, will likely lower the spreads between MBS and Treasuries and put further juice behind the housing market.”
9. “I would point out to those who reacted with some invective to the committee’s decision, especially those from political corners, that it was the Congress that gave the Fed its dual mandate. That very same Congress is doing nothing to motivate business to expand and put people back to work.”
10. “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.”
11. President Fisher discussed how the FOMC has civil discourse, reaches a decision and takes action. “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.”
12. “I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors.”
13. “If you want to save our nation from financial disaster, may I suggest that rather than blame the Fed for being hyperactive, you devote your energy to getting our nation’s fiscal authorities to do their job.”
14. “Our people are drowning in unemployment; our government is drowning in debt. You – the citizens and voters sitting in this room and elsewhere – are ultimately in command of the fleet that sails under the flag of the United States Congress. Demand that it performs its duty.”
15. President Fisher referenced Senator Schumer saying to Chairman Bernanke, “You are the only game in town.” (President Fisher was speaking in New York, the state that Senator Schumer represents.) President Fisher said that he would have answered “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 carorundum; 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.”
Well said as always…and I’ll leave it to each of you to google “Illegitimum non carorundum.”
Have a great week.
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