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Former Fed Official Fisher: Investors 'Hooked on Heroin of QE'

Former Fed Official Fisher: Investors 'Hooked on Heroin of QE'

By    |   Tuesday, 25 August 2015 11:22 AM

Former Dallas Fed President Richard Fisher, now a CNBC contributor, said the nation's central bank doesn't care about daily stock-market gyrations but in the end will do the right thing for the nation's economy.

"I don't think there is a single member of the FOMC that's going to react to one day's market activity," Fisher told CNBC. "Nobody on that committee would like to see that continue, they'd like to find the right exit point and they'll see what it is."

But such volatility does tell you about the mindset of the average investor.

"It does demonstrate that people are hooked on the heroin of quantitative easing," he said.

Fisher said "there's a lot of good that's going on in the economy and that's really what the Fed focuses on."

Fisher, who once ran a hedge fund, assured CNBC’s Kelly Evans that Fed leaders “are deliberate people.”

Fed policy will remain “uber accommodative” and will try to provide bankers with a net interest margin through higher rates, and the Fed “will do what’s right.”

Meanwhile, Chinese authorities have taken the measures that they refrained from taking over the weekend to shore up financial markets.

For this writer, Monday’s historic price action provided confirmation that another episode of the financial crisis is under way.

The Dow opened down 1,100 points, nearly made it back even by noon, then dropped 588 for the day amid rapid price movements of 50 to 100 points in minutes. Attention should focus not so much on a merely symbolic interest rate increase but rather on which market segments are so vulnerable that they will have to redeem the “Yellen put.” This is the time Warren Buffett refers to when some swimmers will be revealed as not wearing any trunks (see Jim Grant below on junk bonds).

Mohamed El-Erian, Chief Economist at Allianz, named two developments that are needed in the now: action from the Chinese authorities to stabilize their markets, and prices low enough to attract buyers, because prices “have been inflated well beyond fundamentals by central bank policies.”

He suggests this requires overshooting on the downside. He warned that “imploding” Asian currencies are “transmitting contagion to the rest of global markets.” A cynic would predict that instead of heeding El-Erian’s advice, the Fed will move again to reflate the bubble.

Last week, this writer reported that the VIX was restive. Brian Stutland, of Equity Armor Investments, told Melissa Lee that surges like this are rare and call for a change in Fed policy.

A major theme of this market should be the effect on TBTF banks, heavily touted by the sell side, in order to gauge the possibility of another bailout.

CNBC’s Bob Pisani reviewed the action in banks like Citigroup (C) and SunTrust (STI), a “massive selloff, followed by a fast rally,” but still down for the day, “an entire year’s volatility in half an hour,” even greater than 2008. Kayla Tausche reported that the sector fared “particularly poorly,” second worst only to energy.

James Grant, of Grant’s Interest Rate Observer, blasted the Federal Reserve for fostering the idea, adopted by other central banks, that they should override the price mechanism, raising asset values in order to “mobilize spending by people who have assets.”

He cited as a consequence of these valuations, bank lending at low rates to companies with leveraged balance sheets, under “looser terms than it has been in times past.”

He concluded that this practice “pulls demand forward and pushes failure out,” producing the lowest junk bond default rate in the 40 years of data.

This writer looks for another bailout of both banks and borrowers in this cycle.

Finally, Dennis Gartman, of the Gartman Letter, warns traders not to be too quick to take advantage of apparent bargains in energy by going long of crude as he did.

Gartman recommends that traders take whatever positions they have and make them smaller.

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Fisher: ‘The Fed Will Do the Right Thing’; James Grant: Prices ‘Artificial Worldwide’
stock market, investors, dow, fed
Tuesday, 25 August 2015 11:22 AM
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