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Gilad Alper
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Sell side analyst for 15 years, worked for Merrill Lynch and Commerzbank covering the technology sector. Currently I work in Israel for Excellence-Nessuah, covering a variety of companies in the telco, agrochemicals, and E&P sectors. I write frequently for Israeli financial newspapers about... More
  • Stanley Fischer's Nomination – Not A Home Run 0 comments
    Jan 10, 2014 1:20 PM

    Today's nomination of Stanley Fischer to Federal Reserve Vice Chairman is greeted with enthusiasm by the US media and many economists. However, Fischer's track record, as the governor of the BoI (Bank of Israel), is a topic of heated debate in Israel.

    The Israeli economy did fare better than most Western economies during the aftermath of the bursting of the US real estate bubble. However, this relatively solid performance is best explained by the resilience of the exporting sector (pharmaceuticals, military equipment, technology, Intel's large new fab that went online in 2009) and also by the fact that Israeli commercial banks engaged in the sub-prime craze only to a limited degree.

    Fischer had little to do with any of these factors. Rather, the former governor was particularly active and aggressive in cutting the base lending rate. When Fischer took office as governor in May 2005, the interest rate was 3.5%. In November of 2008, he started to cut the interest rate as a response to the onset of the financial crisis and by the time he left office in June 2013, the rate stood at 1.25%.

    There was nothing unique in Fisher's response, as most central bank governors were implementing aggressive monetary policies in response to the crisis. Unfortunately, Fischer was also not unique in that his monetary policy is accused of creating asset bubbles.

    Fischer hoped that cutting the interest rate would make loans cheaper and would encourage economic activity. Fischer's policy did indeed cause Israelis to take on more debt, but most of that credit expansion was in mortgages and government debt. Only a small portion went towards capital investment - less than 20%, based on BoI data.

    Ironically, in his attempt to counteract the impact of the bursting of the US real estate bubble, Fischer managed to inflate a whole new bubble in Israel. During his eight-year tenure, real estate prices increased by 85%. This sharp increase led to a growing frustration among the Israeli middle class. According to a recent study, an Israeli citizen needs on average 135 monthly salaries to afford an apartment, compared with 76 salaries in France and 64 salaries in the UK.

    (click to enlarge)

    The impact from Fischer's policies is felt in other assets as well. The TA-25, Israel's main equity index, hit a record high in 2013 while corporate profits are 10-20% below their peak and forecasts are for profit growth to decelerate in 2014. There's little doubt among many economists in Israel that Fischer's low interest rate policy is a major factor behind these frothy equity valuations.

    Finally, Fischer was quite active in the forex market, trying to bolster the USD vs. the strong local currency. Responding to the exporting sector lobbyists complaining about the weak USD, Fischer increased the foreign currency reserves of the BoI to $78bn in June 2013, up from $29bn in 2007. Israel now has a foreign currency reserve of about $10,000 per capita, compared with OECD average of $4,600. In a country that suffers from a high cost of living, an even stronger currency would have lowered the cost of imports (Israel imports crude oil, raw materials, consumer electronics, clothing, furniture etc). What Israelis got instead is more dollars per capita than almost any other country.

    So what does Fischer's nomination mean for the US economy? Fischer, like most central bankers, did not see the US real estate crisis coming and underestimated its potentially devastating impact. Therefore, he is unlikely to improve the Federal Reserve's notorious inability to foresee asset bubbles and deal with them proactively.

    Based on his policies as governor of the Bank of Israel, Fischer is unlikely to oppose the efforts of the Fed to re-inflate the US real estate bubble and he's known for his support of QE3.

    Stanley Fischer does seem to differ from current Fed policy makers in that he does not view "forward guidance" favorably. But these are cosmetic nuances in my view. Where it matters, and despite all the fanfare, US investors should expect more of the same from Stanley Fischer. If you believe current Fed policies are beneficial for the US economy then Fischer isn't going to spoil the party. If, on the other hand, you believe that the Fed's unprecedented expansionary monetary policies merely lay the groundwork for the next economic crisis, then Fischer is not going to save you.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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