Richard Fisher was the president and CEO of the Federal Reserve Bank of Dallas from A.D. 2005 to A.D. 2015 . He’s now a director of PepsiCo and ATT, a senior advisor to Barclays, and a CNBC contributor. The man is accomplished and “connected”. We he talks, we’d do well to listen closely.
In reaction to the dramatic stock market sell-off during the first week of A.D. 2016, Mr. Fisher “talked” in a recent article entitled “Don’t blame China for the sell-off”:
“Recent volatility and downside slippage in the equity markets has been ascribed to China and the potential for slowing global economic growth. To be sure, these are factors worth watching but they are hardly newsworthy.
“While I would not completely pooh-pooh the effect of developments in China on the rest of the global economy, I believe another factor is of greater importance in pricing the U.S. stock market going forward: the effect of accommodative Federal Reserve policy.”
Mr. Fisher is telling us that, contrary to popular opinion, the recent US stock market fall was not triggered by China’s economic problems—it was caused by Federal Reserve policies.
Few would be surprised by Mr. Fisher’s statement. We all pretty much suspect that the Fed is responsible for the current economic problems. Still, given that a former president of the Dallas Federal Reserve Bank is making these admissions, they are amazing.
“I spent 10 years (through last March) as a participant in the deliberations of the Federal Open Market Committee, setting monetary policy for the U.S. The purpose of zero interest rates [ZIRP] engineered by the FOMC [Federal Open Market Committee], together with the massive asset purchases of Treasurys and agency securities known as quantitative easing [QE], was to create a wealth effect for the real economy by jump-starting the bond and equity markets.”
Interesting choice of words.
In fact, when I think about it, Fisher’s word choice might be revelational.
Mr. Fisher wrote that the purpose for ZIRP and QE was “to create a wealth effect for the real economy . . . by jump-starting the bond and equity markets.” His word choice implies that the “bond and equity markets” are something external to, and not part of, the “real” economy. His reference to the “real” economy implies that he recognizes that there’s also an alternative, “unreal” economy that includes the stock and bond markets.
Fisher doesn’t precisely say so, but his use of the word “for” (in “to create a wealth effect for the real economy by jump-starting the bond and equity markets.”) implies that the “real” economy is analogous the internal combustion engine on your car. That’s the primary engine that truly makes the car “go”. However, that “real” economy can only be started by means of a second, “unreal” economy that’s analogous to the electrical starter motor on your car.
You might suppose that I’m jumping to conclusions based on Mr. Fisher’s text. However, as you’ll read, Fisher later raises the same implication for a second time. That’s good evidence that my reading of his text is not unreasonable.
More, Mr. Fisher’s extraordinary background makes clear that he must be a very competent communicator. I doubt that he ever speaks or writes a single word without precise intent. As such, he can be expected to pick his words very carefully—especially for an article as important as the one I’m describing here.
Fisher’s decision to use the adjective “real” to modify the word “economy implies that he—and perhaps other members of the Federal Reserve—think in terms of the US (and even world) as having two economies: a “real” economy and a second, alternative economy that I’ll label as the “unreal” economy.
Mr. Fisher doesn’t define the “real economy,” but I presume that he means the free market where the laws of Supply and Demand set prices based on economic fundamentals. In broad strokes, we might describe the “real” economy as “Main Street”.
Mr. Fisher’s exclusion of the stock and bond markets from the “real” economy implies the existence of a second, alternative and “unreal” economy that does include the current stock and bond markets. More, this “unreal” economy does not rely on the laws of supply and demand to set market prices. Instead, his “unreal” economy relies on central planning and market manipulation by government and the Fed to set market prices. We might label this hypothetical, “unreal” economy as “Wall Street”.
• The Fed’s use of stock and bond markets to stimulate the “real” economy, implies that the Fed’s plan was to artificially stimulate the “unreal” economy in hopes that the resulting growth in the “unreal” markets (higher stock prices) would result in higher public confidence which would then indirectly stimulate growth in the “real” economy.
I.e., the Fed would use ZIRP and QE to stimulate the unreal/fictional economy we see on “Wall Street” to stimulate (raise confidence in) the “real” economy seen on “Main Street”.
Assuming that it’s even possible to directly stimulate an “unreal” (fictional) economy in order to indirectly stimulate the “real” economy, the Fed’s plan failed. The unreal/fictional economy of stock and bond markets (Wall Street) was stimulated to reach record highs and some investors reaped fabulous profits. But, the “real” economy (fundamentals, free markets, Main Street and the middle class) was largely unenriched by the fictional/“unreal” economy’s record highs and remained stagnant or even tended to disappear.
Despite all the Fed’s trickery, public confidence never really rose.
• Some readers might suppose that I’ve gone way too far by inferring the existence of an “unreal” economy from Mr. Fisher’s reference to the “real” economy. Maybe so.
But my inference might not be as unreasonable as some would guess. Have you ever followed the stock market and noticed a “disconnect” between stock prices and “reality”? For example, even though the economy never really recovered after the onset of the Great Recession in A.D. 2008, the stock market went into a bull run that lasted until the end of A.D. 2014. What fundamentals, what elements of economic reality justified that bull run? If you agree that there was a peculiar “disconnect” between economic reality and the stock market’s bull run, you’re not far from admitting that there may be a “real” economy (that didn’t really recover after the Great Recession) and an “unreal” economy that includes the stock market and its mysterious bull run.More, anyone who doubts the existence of the “unreal” economy that I’m suggesting need only look to gold commodity markets where there may be 200, even 300, ounces of “paper-gold” claims for every 1 ounce of physical gold available for delivery. If that’s not “unreal,” what is?
How ‘bout setting the price of physical gold with the naked short selling of piles of paper-gold claims? Are those prices set by the laws of supply and demand or by the central planning of the Fed? Are the resulting prices “real” or “unreal”?
Look at fractional reserve banking that allows banks to lend nine fictional dollars to consumers for every $1 in capital (Treasury Notes) held in the bank’s vault. “Real” or “unreal”?
The whole idea of a “debt-based monetary system” is almost too fantastic to be believed, and also violates the constitutional mandate for gold or silver money—and yet we have a debt-based monetary system. “Real” or “unreal”?
What about “fiat currency” backed by America’s “full faith and capacity for self-delusion” vs. an asset-based currency backed by something tangible like gold or silver? Which currency is “real”? Which is “unreal”? Which one do we have?
Then there are the economic “bubbles” that the Fed and/or government routinely create to stimulate the economy. Those bubbles look huge, but they’re illusory, empty and always destined to “pop”. Are those bubbles part of an economy that’s “real” or “unreal”?
What about negative interest rates? Doesn’t that concept sound a tad “unreal” to you?
Sub-prime mortgages, anyone? Banks lending currency to people the banks know won’t be able to repay the debt? Real or unreal?
And then there’s the alleged “existence” of over $1 quadrillion worth of derivatives in a world economy with an annual GDP of $60 trillion. In other words, the value of our derivatives (which didn’t even exist a generation ago) is roughly 20 times greater than the world’s annual GDP! How is that even possible?! One, maybe even two, quadrillion dollars in “derivatives” is about as illusory, fictional and fraudulent as me claiming to have 400,000 tons of gold hidden in my closet. It can’t be. The world’s derivatives aren’t even possible in a “real” economy. They are a largely fictional concept that could only exist in an “unreal” economy.
So, do you still doubt the existence of an “unreal” economy?
In fact, when you stop to think about it, the “unreal” economy is all around us. Our entire financial system is about as “unreal” and “fictional” as anything H.G. Wells and Arthur C. Clark might ever have imagined. It’s like a bunch of Federal Reserve economists came up with the current system after they were completely stoned on LSD. And We Duh Peepul have accepted this “unreal” system just like the townsfolk in the fable about the emperor dressed in invisible clothes.
There’s undoubtedly a “real” world and a “real” economy where most of us mistakenly think we live.
But, apparently, Mr. Fisher (and the Fed, itself) recognizes that there’s also another “unreal,” fictional and fraudulent economy which has been centrally planned and controlled by the Fed. Most of us are currently and unwittingly ensnared in that “unreal” economy just like the people in the fable who all agreed that the emperor’s invisible clothes were simply “fabulous, dahling”.
Mr. Fisher’s warning implies that the Fed is no longer able to control the “unreal” economy and that, as a result, the “unreal” economy (including stock and bond markets) may be about to implode.
• Mr. Fisher continues:
“The impact [from QE and ZIRP] we had expected for the economy and for the markets was achieved.”
Whether the Fed’s expectations were truly “achieved” depends on which “economy” Mr. Fisher referenced: the “real” economy of Main Street or the “unreal”/fictional economy of stocks, bonds, central planning on Wall Street.
Undoubtedly, the Fed’s ZIRP and QE policies did stimulate the unreal/fictional economy of Wall Street to reach record (irrational) highs and push the price of gold down to irrational lows.
However, there was no similar “achievement” for the “real” economy of Main Street. The middle class is disappearing. The “real” economy has been neglected, sacrificed and in some places destroyed. Why? Perhaps, in order to save the “unreal”/fictional economy from collapse.
The “real” economy (where you and I live, work and produce real wealth) may have been intentionally sacrificed by the Fed, to feed the “unreal” economy of Wall Street and central planners.
If so, Mr. Fisher’s suggestion that the Fed directly stimulated the “unreal” economy in order to indirectly stimulate the “real” economy is a lie used by the Fed and Wall Street as a pretext to loot the “real” economy.
“By February of 2009, the Fed had purchased over $1 trillion in securities. With interest rates throughout the yield curve moving in the direction of eventually resting at the lowest levels in 239 years of history, the stock market reacted: It bottomed in the first week of March of 2009 and then rose dramatically through 2014. The addition of a third round of QE, which had the Fed buying $85 billion per month of securities to ultimately expand its balance sheet to over $4.5 trillion, juiced the markets.”
The lowest interest rates in 239 years takes us all the way back to this country’s beginning with the “Declaration of Independence” of A.D. 1776.
Mr. Fisher served as president of the Dallas Federal Reserve Bank during the A.D. 2009 through A.D. 2014 period he just referred to (when the markets enjoyed a fabulous bull run). He should therefore know what he’s talking about.
When Mr. Fisher admits that the Fed intentionally “juiced” the stock markets to cause the “dramatic rise” (bull run) from A.D. 2009 through A.D. 2014, we must believe him.
More, Fisher’s admission should scare every ordinary American who’s invested directly or indirectly (through pension funds) in the stock market.
Because Fisher has pretty much admitted that the 9,700-point difference between the Dow’s low of 8,100 in March of A.D. 2009, and its high of 17,800 in December of A.D. 2014 is mostly fictional. I.e., almost 9,700 points out of that 5-year bull run were probably based on the Fed’s fictions and stimulation of the “unreal” economy.
All of which implies that as much as 8,000 points of today’s Dow (currently at 16,350) may be as “unreal” as the emperor’s invisible clothes. As such, those 8,000 points could disappear at any moment.
How many of you really want to invest your wealth in the “unreal” economy that Mr. Fisher has implicitly revealed?
“I voted against QE3 but the majority of the committee embraced it. One could argue—as I did—that QE3 and its predecessor rounds front-loaded the equity market. Stated differently, I believe we engineered a version of the “Wimpy philosophy”: We gave stock-market investors two hamburgers today in exchange for one or none tomorrow. We pulled forward the price-reaction function of markets.”
Again, Fischer expressly admits that the Fed artificially stimulated the stock markets of the “unreal” economy. The Fed artificially increased (“engineered”) the stock market rise to reach much higher prices than fundamentals and the “real“ economy” would warrant.
“If that is a correct assessment, then there may well be a payback period of lesser movement in stock prices to follow. 2015 might have been the beginning of that balancing out: Minus dividends, the S&P and every other index experienced minor negative returns last year. . . . It would not be unreasonable to expect subdued returns this year given that stocks are still richly priced by historic standards.”
Fisher’s language obfuscates. His reference to a “payback period of lesser movement in stock prices” means that he anticipates that stock prices are currently due to stagnate and probably fall. His “subdued returns” in A.D. 2016 because stock still “richly priced” means that stocks are currently overpriced that they should soon suffer a significant decline.
Fisher is simply saying that the Fed’s ZIRP and QE policies artificially raised stock prices in the “unreal markets” for most of the past seven years. However, now that the Fed’s stimulus is ending, we should expect a correction (“payback period”) wherein the artificially high stock prices in the “unreal” economy will fall back (“balance out”) to a level (Dow 8,000?) more closely aligned with the fundamentals of the “real economy”.
More, given that ZIRP and QE have failed to stimulate the “real” economy, the Fed has run out of economic “tricks” to artificially stimulate both the unreal and real economies. Without those tricks, there’ll be no way to sustain the artificially high stock prices. Therefore, stock prices will “balance out” (fall dramatically).
The Fed/Atlas is shrugging.
“We will see what ensues. But one thing to bear in mind is that the Fed is focused on the real economy looking out to the intermediate term, not necessarily on sustaining the stock market today.”
Again, Fisher distinguishes between the “real” economy and the stock markets. He implies that the stock markets are not in the “real” economy. For the second time in his “Don’t Blame China” article, Fisher implies that there’s also an alternative, “unreal” economy.
Fisher’s claim that the Fed is now “focused on the real economy” is bunk. If the Fed was ever focused on the “real” economy, it would’ve given its trillions of dollars in monetary stimulus to Main Street rather than Wall Street.
The Fed is not currently “focused” on the “real” (unmanipulated economy) except in the sense that one tied to a railroad track might be “focused” on the sight of an approaching freight train. In the end, there’s no point to the Fed “focusing” on the “real” economy because there’s virtually nothing left that they can do to directly control it. At this point, they can’t even control the “unreal” economy enough to generate a positive result.
The Fed no longer has the resources to maintain and enrich the stock markets to the same extent as they did over the past several years. Fisher is warning that the Fed is no longer able to continue the charade.
“In an effort to revive the economy, the Federal Reserve floated all boats with its hyper-accommodative monetary policy. The real economy has been extensively repaired.”
Again, Fisher’s reference to the “real economy” implies the existence of an “unreal” economy.
Even so, Fisher is trying to cover his backside. He’d have us all believe that the Fed used its “hyper-accommodative monetary policy” altruistically to float “all boats” in both the “real” and “unreal” economies.
In fact, the Fed did float a lot of boats in the “unreal” economy of the stock and bond markets. Some people got rich. However, by doing so, the Fed simultaneously sank a lot of “boats” in the “real” economy. A lot of people were wiped out. How many Americans lost their jobs, businesses or homes in the Great Recession. Wasn’t that recession triggered by sub-prime mortgage failures in the “unreal” economy?
Contrary to Fisher’s claim, the free markets of the “real” economy have not been “extensively repaired”. They’ve been generally abandoned, made more vulnerable or nearly destroyed.
We’re left to wonder if the Fed trashed the “real” economy by accident or by intent.
I suspect that a thorough analysis of the “real” and “unreal” economies would show that trillions of dollars in wealth have been siphoned out of the “real” economy and either disappeared into the maw of the “unreal” economy or outright destroyed. Under the Fed’s “central planning,” we’ve either seen the greatest transfer of wealth (from the “real” economy to the “unreal”) in history—or we’ve seen the greatest destruction of wealth known to man.
I doubt that such transfer or destruction could be unintended.
“And the easy money in investing has been made.”
“Easy money” was made by investors in the “unreal” economy because the Fed’s “accommodative policies” rigged the game.
Wanting to increase public confidence in the “real” economy, the Fed made sure that those who invested in the stock markets of the “unreal” economy couldn’t lose. So long as the Fed continued to manipulate markets and artificially stimulate ever-higher stock prices, almost any fool could make “easy money” in the stock markets.
But now, Mr. Fisher warns that the Fed is withdrawing from market manipulation and artificial market support. Without that support and market rigging, the “unreal” markets will collapse. More, the last six years of “easy money” will be replaced by several more years of “hard money” (perhaps even “real” money) and by spectacular losses for those invested in the “unreal” economy.
Soon, the Fed won’t be here to hold the investors’ hands and ensure that everybody wins.
Big trouble is headed our way. Those with eyes to see might do well to “come out of her, my people.”
“Now we will see who the truly smart investors are and who merely looked smart by having ridden the rising tide engineered by the Fed.”
Again, Fisher admits or implies that:
1) The stock market’s bull run of A.D. 2009 – 2014 was “engineered” by the Fed;
2) The reason some investors profited handsomely was not because they were smart—but, because the Fed rigged the game to favor investors and fool consumers into believing there was an economic “recovery”; and more,
3) Without the Fed to rig the game, a lot of people who thought they were brilliant are about to discover that they’re actually pretty dumb when the real wealth they’ve invested in the “unreal” economy’s stock and bond markets simply disappears.
“As Warren Buffet has often said: ‘you only learn who’s been swimming naked when the tide goes out.’
“My guess is that, going forward, the view will be quite revealing.”
In other words the “tide” of Fed central planning is about to go out. When it does, those who’ve been skinny-dipping in the stock market (that is, investing without understanding of the differences between the “real” and “unreal” economies) will lose their assets and be exposed as naked fools. The “easy money” of the “unreal” economy is about to give way to “hard money” (real money?) and incredible losses for those invested in the “unreal” economy.
• Incidentally, what is the premier investment of the “unreal economy”?
Paper—as in stocks, bonds, paper gold and other debt-instruments.
What’s the premier investment of the “real economy”?
Gold. Physical gold. It’s “real”.
Reality is coming.
In preparation, you should also get “real”.