Submitted by Taps Coogan on the 27th of January 2020 to The Sounding Line.
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Scott Minerd, Guggenheim Partners co-founder and Global Chief Investment Officer, recently spoke with Bloomberg Markets about his recent statements that monetary policy has become a policy of “bubble to bubble” and that momentum investing psychology has become analogous to a Ponzi Scheme.
Some excerpts from Scott Minerd:
“If you take the history of the United States since the late 1970s, I would call monetary policy a policy of ‘bubble to bubble.’ For instance, to save the economy after the (1987) stock market crash, the Fed cut rates and over inflated commercial real-estate and then we had to bailout the banks with the Resolution Trust Corporation. So then once things calmed down again, investors no longer thought that commercial real-estate was safe and they inflated the internet bubble through the wealth effect to keep the economy going. And then, of course, it went bust. So then people didn’t feel safe in stocks, so they started buying homes and we played that out and it bust… My attitude is, if you look at the amount of leverage in corporate America and where we are today, you’re definitely inflating a bubble here in credit.”
“…Nobody I know is smart enough to figure out when the music stops… If two days from now… there is an announcement from the Federal Reserve… that they are thinking about tapering the bill-purchase program, remember what happened when we started talking about tapering QE in 2013. We didn’t even need the act (to start the ‘taper tantrum’).”
“I think the official name of QE is ‘Large Scale Asset Purchases’ and this (bill purchase program) is large scale asset purchases… Whatever label we put on it, the consequences are the same… When you put liquidity into the system, when you create money, which is what the central bank is doing, it doesn’t matter what you buy, you could buy baseball cards, that liquidity leaks out into other asset categories, and so you get inflated prices in other areas…”
“I am not so sure that when Hyman Minsky framed the comment about a Ponzi market, he was thinking about some nefarious activity going on. It’s more of an investor behavior which is being encouraged by the Fed… Look, there was a debate back in December (2018), ‘Do we have a Powell Put?’ We do. So, we’re operating back in that mode again…”
As we have noted on several occasions, the transformation of the Fed from an organization focused on moderating recessions as they naturally occur, into one that tries to prevent recessions by front-running them with stimulus, has transformed them from a counter-cyclical force to a pro-cyclical ‘bubble blowing’ force on the economy and markets.
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