Frank Veneroso is een van die mensen die je als volger van financiële markten in de gaten moet houden. Hieronder een samenvatting van zijn laatste rapport.
1. A year ago the Fed insisted there were no incipient bubbles, and it was not trying to blow more bubbles. Unusual equity market strength was supposedly based entirely on the existence of a powerful “V” shaped economic recovery.
2. Well, as the months and quarters passed, it became clear there was no “V” shaped economic recovery. And by mid-summer the economy seemed to be faltering.
3. Then the talk of a second round of QE emerged. It was then understood the market remained aloft because investors believed the Fed wanted high stock prices. Furthermore, it was hoped the Fed would engage in a second round of QE to ensure against a further relapse in the economy and the stock market.
4. Initially the debate was whether the Fed would have to see the whites of the eyes of a double dip or price deflation or see a collapsing stock market before it launched QE-II.
5. By mid-September the U.S. economic data had improved somewhat and the stock market had rallied. Nonetheless, the QE talk heated up. Why?
6. Because the Fed through its September statement as well as through various spokesmen indicated it was targeting a higher rate of inflation and a much lower rate of unemployment, and it wanted to get there fast.
7. According to the Fed the credit channels of the transmission mechanism of monetary policy are broken. Hence the need for QE. QE works through a “portfolio balance channel” to get asset prices up.
8. The asset class most likely to be affected and prove beneficial for aggregate demand is equities.
9. By all econometric estimations it takes big increases in equity prices to achieve modest increases in consumer demand.
10. Therefore, it follows that to get unemployment down a lot so as to get inflation up to the Fed’s target will require economic growth well above trend. If this is to be done by way of QE’s impact on equity prices, the targeted rise in equity prices must be large. In other words, the formerly mendacious Fed admits it is in the business of blowing stock market bubbles once again.
11. The moral hazard market has been aware of the Fed’s policy put. Market participants are now catching on to more aggressive Fed objectives. They are acting – and will be acting – accordingly