Richard W. Fisher served as the President and CEO of the Federal Reserve Bank of Dallas from A.D. 2005 until he retired earlier this year.
CNBC recently published an article entitled, “Fed’s Fisher Say’s Market Is ‘Hyper Overpriced,’ See’s A Major Correction”. According to that article, while being interviewed on Squawk On The Street, Mr. Fisher said,
“Are we vulnerable in my personal opinion to a significant equity market correction? I do believe we are, and the reason for that is people have gotten lazy. They’ve depended totally on the Fed.”
First, I view Fisher’s charge against “lazy” investors as an attempt to distance himself and the Federal Reserve from responsibility for he believes is a coming “significant equity market correction” (also known as a “crash”). Fisher is telling all the “lazy” investors “Don’t blame me and the Fed when you lose your assets—it’ll be your own darn fault.”
Nevertheless, despite what may be the self-serving nature of Fisher’s warning, he’s right. Investors depend primarily—and excessively—on the Fed to guarantee their prosperity.
Evidence? Look at stock markets jumping up or down depending on whether Federal Reserve Chairman Yellen says—or doesn’t say—words like “patience”. The markets’ response to Yellen’s mere choice of words is absurd and far removed from rational theory of investing.
Investors have become “lazy” in the sense that they don’t rigorously analyze stocks and corporations and devote great effort to deciding where to invest their wealth. Instead, they tend to invest in almost any stock and expect to profit because the Federal Reserve will essentially guarantee that the equities markets will rise.
But. Even if investors have become “lazy,” the problem isn’t simply the fault of the investors. The fault also lies with the government and Federal Reserve’s attempts to manipulate the markets to maintain or increase investors’—and voters’—confidence in the economy and government.
• Overt manipulation of the markets by government began in A.D. 1988 when President Ronald Reagan signed Executive Order 12631 and created what came to be called the “Plunge Protection Team”. The object of this Executive Order was to create a team of governmental officers able to intervene in the equities markets to prevent serious and sudden declines in those markets. Their objective was to prevent market “panics” from causing the markets to drop more than a few hundred points in a single day.
At the time, mitigating stock market panics and thereby minimizing the threat of losing huge amounts of investor capital seemed worthwhile. Nevertheless, guaranteeing that markets couldn’t crash more than a few hundred points in any given day constituted officially-sanctioned market manipulation.
Thus, “manipulation” of markets like the Dow is not a recent conspiracy theory advanced by folks wearing tin-foil hats. Market manipulation has been a legally-sanctioned, market reality for 27 years.
The problem is that once government authorized market manipulation to prevent sudden market declines, politicians seeking reelection realized wondered if it shouldn’t also be possible to artificially cause markets to rise. Rising markets created public optimism. Public optimism helped incumbents to be re-elected. Rising markets please Wall Street. Wall Street made political campaign contributions to incumbent politicians. Those campaign contributions helped incumbents to be re-elected. Inevitably, government began to do whatever it could to covertly guarantee steady market rises—even if there was no fundamental reason to justify that rise.
Markets went up. Nobody seemed to know why. They just did.
• Initially, only a few investors understood that the markets were rigged to produce (nearly) persistent gains. Inevitably, the word spread—first as a rumor, later as a conspiracy theory, finally as an undeniable fact. For example, on March 25th, John Crudele published an article in the New York Post entitled, “Stock Market Rigging is No Longer a ‘Conspiracy Theory’”.
Today, anyone who cares, knows that the markets are manipulated.
Once investors realized that the government and Federal Reserve manipulated and therefore controlled US markets, it was increasingly unnecessary to expend great effort on selecting stocks for investment. Instead, all investors had to do was focus on learning to read the Federal Reserve’s “tea leaves”. Once investors could accurately anticipate the Fed’s acts of market manipulation and control, they could invest in almost anything. I.e., so long as the Federal Reserve and government: 1) protected the markets from sudden and significant falls; and, 2) created an economic climate that virtually guaranteed stocks would rise—investors could invest in almost anything and still make a profit.
Result? Just as Mr. Fisher observed, by relying on the Federal Reserve’s ability to control the markets and almost “guarantee” investor profits, investors became both “lazy” and dependent on the Federal Reserve.
The key to successful investing was not simply an investors ability to pick stocks based on corporation fundamentals. Instead, much of the investors’ goal was to discern whatever percentage Return On Investment that the Federal Reserve would implicitly guarantee, and then have a sufficiently high credit rating to borrow money for investment at a lower rate. If the Fed was going to guarantee that the markets made 5% per year, and an investor had a sufficiently high credit rating to borrow $1 million for investment at 3% a year to invest in stocks, he was were essentially guaranteed a 2% net gain for the year and a reputation as a brilliant investor.
Of course, the previous scenario is exaggerated to illustrate my argument. Although investing wasn’t really that simple, investors nevertheless came to rely too heavily on the Fed to manipulate, control and guarantee that markets would rise. So long as the Fed officially guaranteed that markets would rise, investors had a “can’t lose” level of confidence and invested freely in stocks, homes—almost anything.
Investor confidence was shattered by the market crash of A.D. 2007-2009. But the Fed has spent most of the last six years trying to demonstrate that it’s still in control of the markets. That attempt hasn’t been particularly successful, but some investors still believe the Fed is in control of the markets.
• In any case, when the government and Federal Reserve established their ability to lawfully manipulate and therefore control the markets, they also assumed liability for guaranteeing that the markets would rise forever.
Mr. Fisher now implies that all of America’s “lazy” investors (who’ve learned to depend upon the Federal Reserve to manipulate the markets to guarantee investor profits), should now learn to take more personal responsibility for the coming “correction” (possible crash) and not blame the Fed, the government or Mr. Fischer if the stuff hits the investment fan at some point in the foreseeable future.
Mr. Fisher’s remarks also imply that the public awareness that government and Federal Reserve controlled the markets was exaggerated. The gov-co might’ve had undue influence, but it never had absolute control. Even if they’d had control, they’ve lost, or are now losing that control and won’t be able to prevent the “significant correction” that Fisher sees coming.
Mr. Fisher seemingly seeks to escape personal liability for that “correction” and for the Fed’s coming failure to guarantee profits to investors.
Apparently, Fisher believes that America not only has financial institutions that are “too big to fail”—we also have institutions that are “too big to blame”.
• CNBC continued:
“Fisher retired on Thursday, having occupied the Dallas Fed’s highest office for the last decade. Regarded as a policy hawk, he frequently said the central bank should raise interest rates sooner rather than later.”
Mr. Fischer is 66 years old. That’s not an unusual age to retire for most people, but it seems surprisingly premature for a man occupying a position of significant power. I can’t help wondering why Fisher is retiring at such an early age? Does he plan to (finally) play golf every day? Will he and his wife spend their “golden years” traveling ‘round the world?
Or is he following in the footsteps of Alan Greenspan and Ben Bernanke and getting out of the Fed while the getting’s good? Is Fisher’s departure from the Fed something similar to rats leaving a sinking ship?
“Fisher brushed aside the idea that the Fed is responsible for conditioning laziness among traders by setting easy monetary policy, saying little is being done in terms of fiscal policy, which forced the central bank to keep rates abnormally low.”
Investopedia defines “fiscal policy” as “the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply.”
Thus, Fisher seems to say that the coming correction will be the fault of the government’s “fiscal policy” rather than the Fed’s monetary policy. So, again, I see Fisher trying to shift blame from himself and the Federal Reserve to not only the “lazy” investors, but also to the fiscally-irresponsible government. Even if the Fed’s monetary policy (artificially low interest rates) helps cause the coming correction, the Fed is still innocent since it was “forced” by government to suppress interest rates. In other words, the devil (government) made the Fed do it.
Fisher seems determined to pin the rap for the coming “correction” on somebody, anybody, other than himself and the Federal Reserve.
M’thinks the economist doth protest too much.
• Fisher also said, “In the event of a market correction, the Fed should not intervene because the market is ‘hyper-overpriced’.”
First, I think that’s a true statement. The equities markets are “hyper-overpriced”.
But, if the markets are “hyper-overpriced,” it should follow that Mr. Fischer anticipates a “hyper-correction” wherein the markets will fall swiftly, significantly and perhaps by even more than the 53% fall seen from October A.D. 2007 through March of A.D. 2009.
Second, even if Mr. Fisher’s statement is true, it may still be a little misleading or even disingenuous since he implies that “hyper-overpriced” is bad and therefore deserves “correction”. He seems to say, “This is gonna hurt, folks, but we’ll all be better off when it’s finally over. The Fed could intervene, but it should not. Not intervening will be best for all of us.”
But is Mr. Fisher is really saying that the market is so “hyper-overpriced,” that the Federal Reserve simply lacks the resources to kick a can of such enormity any further down the road? Have our economic problems grown too large to be managed by the Fed? Or, has the Fed been so weakened by QEs 1, 2 and 3, that it’s no longer capable of “controlling” the market?
Rather than admit the Fed’s grown impotent and too weak to intervene, is Mr. Fisher trying to spin public perception by implying that the Fed is too “wise” to intervene again? But what’s the truth? Too weak, or too wise?
Whatever meaning Mr. Fisher may have intended, his interview at least suggests that the days of Federal Reserve intervention, manipulation, or control of the markets is coming to an end.
- “Yes, we have … conditioned the markets. I think the markets, however, have a responsibility to do their own work and expect that as the economy improves, things are going to change. Over time the [Fed Chair Janet] Yellen committee will engineer normalization, however long that takes, and I think the market should get prepared for that,” he said.
Interesting choice of words. Fisher admits that the Fed may have “conditioned” the markets. Not “controlled”. Not “manipulated”. Not even “influenced”. It was all quite innocent and intended always to help the “little people”. Mr. Fisher and the Fed merely “conditioned” the markets much like a faithful gardener might till the soil. “Over time,” the trusty Federal Reserve will “engineer” some sort of economic “normalization”—“however long that takes.”
If Mr. Fisher is optimistic (or at least hopeful) that the economy will someday return to “normal,” he is clearly pessimistic that such normalcy will return any time soon.
Instead, Mr. Fisher seems to warn the public that the “market should get prepared” for a “correction” (market fall) that will be significant (50%? More?) and long-lived.
Mr. Fisher hasn’t said when he expects the “correction” to take place.
However, given that he recently retired, I’m willing to speculate that he may have retired to prepare himself and his family for the coming “correction”. If my speculation were roughly correct, how long do you suppose it would take Mr. Fisher to “get prepared” for a coming correction? Three months? Six? A year?
I can’t imagine that Fisher is warning about a coming correction that he doesn’t expect to arrive for more than a year. I’m therefore guessing that Fisher expects a signficant correction to come before the end of this year.
• Fisher’s warning is understated.
He didn’t scream, “Run, you mutha’s run!”
But, given his intellect, education and background as president of the Dallas Federal Reserve, I read his warning as being just about as explicit as he could provide.
A man who served as president of the Dallas Federal Reserve for ten years is warning us to “get prepared” to a significant and long-term “correction”. He should know what he’s talking about. I think we should heed his warning.