The Federal Reserve’s failure to recognize its role in driving the third dangerous asset bubble in 15 years will destroy the central bank’s reputation for good, said Albert Edwards, global strategist at Societe Generale.
Fed Chair Janet Yellen, who has led U.S. monetary policy for the past two years, is destined for infamy after waiting too long to raise interest rates, Edwards said. The central bank yesterday hiked its target rate by a quarter percentage point
, the first increase in nine years.
“The Yellen Fed will soon be treated with the same contempt the Greenspan Fed was in the aftermath of the 2008 financial crisis,” Edwards said in a Dec. 17 note obtained by Newsmax Finance
. “And they will deserve it.”
Alan Greenspan, who Edwards once described as an “economic war criminal,” led the Fed from 1987 to 2006, when Ben S. Bernanke succeeded him. Edwards blames both men for loose monetary policies that degraded the value of the dollar and created massive asset bubbles in dot-com stocks and housing.
When those bubbles collapsed and led to economic recessions, the Fed responded with even looser monetary policies intended to revive growth. Before yesterday, the central bank held interest rates at record lows in an attempt to encourage borrowing and spending.
But Edwards, who established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation, said it’s too late to avoid another massive collapse in asset prices.
“This time the Fed’s largesse has fueled another corporate debt explosion,” he said. “The real rate of corporate borrowing is even greater than was seen during the late 1990s tech bubble. This is 100 percent attributable to the Fed’s excessively loose monetary policy.”
The equity market poses a particular danger, since many corporations borrowed at record-low rates and used the cash to buy back stock and pay dividends. They neglected to invest the money capital projects that would drive future profits and growth, Edwards said.
Investment-grade bond issuance hit a record $978.5 billion in the first nine months of 2015. That was 13 percent higher than the first three quarters of 2014, when a record $1.13 trillion was sold to investors, according to the Securities Industry and Financial Markets Association.
S&P 500 companies are on course to buy back a record $993 billion of their own shares this year, according to researcher Birinyi Associates. That puts this year on course to top 2007, a year before the last recession began.
“There is a limit to how much degradation of corporate balance sheets bond investors are prepared to tolerate,” Edwards said. “The party’s over and bond investors, who always tend to be more sober types, realize this and have headed for the exits.”
The Barclays Capital High-Yield Bond ETF, which tracks the value of junk bonds, has fallen 12 percent since the beginning of the year, erasing six years of gains
Billionaire investor Carl Icahn said the sell-off will get worse.
“The meltdown in High Yield is just beginning," Icahn last week wrote on his verified Twitter account.
Icahn’s comments came as junk-bond investors were the most scared
they’ve been in three years after Third Avenue Management froze withdrawals from a $788 million credit mutual fund, according to Bloomberg News.
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