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'We Front-Loaded An Enormous Stock Market Rally'

Jan. 07, 2016 6:02 PM ETVTI, IEF37 Comments
Gary Gordon profile picture
Gary Gordon


  • Richard W. Fisher's appearance on CNBC this week offered remarkable insight into why voting members on the FOMC embraced zero percent rate policy as well as QE for so many years.
  • One of the world's most influential people in any room acknowledged that the Fed wanted to push stocks higher to make participants feel wealthier.
  • However, there have been several problems with the Fed's wealth effect ambitions.

Richard W. Fisher served as the President of the Federal Reserve Bank of Dallas for more than a decade (2005-2015). His appearance on CNBC this week offered remarkable insight into why voting members on the Federal Reserve Open Market Committee (OTCPK:FOMC) embraced zero percent rate policy as well as quantitative easing (QE) for so many years.

One of the most controversial statements? Fisher candidly admitted, "What the Fed did, and I was part of it, was front-loaded an enormous market rally in order to create a wealth effect."

He did not say that the Fed sought to achieve maximum employment. He did not bring up inflation targeting or stable prices either. Rather, one of the world's most influential people in any room acknowledged that the Fed wanted to push stocks higher to make participants feel wealthier.

How was this wealth effect supposed to benefit workers? Or promote stable rates of inflation? Presumably, when people feel wealthy, they spend more. When they spend more, corporations see more revenue from the goods and services that they provide. When companies achieve better top-line and bottom-line results, executives express greater confidence by adding new employees. When an increasing number of workers find jobs, unemployment falls to lower and lower levels until, eventually, maximum employment spurs wage growth and desirable levels of inflation.

That was the plan.

However, there have been several problems with the Fed's wealth effect ambitions. For one thing, keeping borrowing costs so low for so long primarily benefited those who were already in decent shape. Wealthier folks have super-sized stakes in the stock market and were able to increase the value of their portfolios substantially; less wealthy folks have seen erosion in real (inflation-adjusted) household income - money that most live month-to-month on. Those in the highest marginal tax brackets were able to add to their real estate holdings. In contrast, very few

This article was written by

Gary Gordon profile picture
Gary A. Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. He has 30 years of experience as a personal coach in “money matters,” including risk assessment, small business development and portfolio management. He favors tactical asset allocation strategies over "set-it-and-forget-it" investing.Gary is often asked to consult as an educator. He has taught financial concepts in Mexico, Singapore, Hong Kong, Taiwan and the United States.As a Certified Financial Planner (CFP), Gary has distinguished himself as a reputable and trusted investor advocate. Gary’s participation on local and national radio has spanned more than two decades. He writes commentary at his web log, TheStockBubble.com.

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Comments (37)

bluescorpion0 profile picture
"Reverting to the average Forward P/E would require operating earnings to reach $114.4 at year-end AND the S&P 500 to sink to roughly 1515."

Why should P/e revert to average when interest rates have not reverted to average?
...and the air is slowly seeping out of the bubbles! Which bubble will pop first and what will be the catalysis!

1. margin calls.

2.corporate high-yield debt. bonds

3. auto loans

4. student loans

5. national/public debt
iknow1 profile picture

Great piece and your followers have digested it well. Goes a long way to explaining how the rich get richer.

Plenty of reasons now to question the FED's intentions as they go through the next part of the economic cycle.

Make it a great day.

Trendhaven profile picture
"Do we even want to ruminate about what will happen if the Fed pushes borrowing costs up appreciably in 2016 and 2017?"
No, I don't think we have to. First, if the Fed was working for the major owners of risk assets when they initiated and extended QE to enhance the wealth of equity owners, we should not expect them to do much to place the indebted corporate interest group into an untenable position by raising rates too far. Secondly, high debt levels, over capacity and demographics will keep growth (of consumption and investment in productive assets), inflation and rates low for a long time, I expect.
Federal tax policy has sent jobs overseas, Former President Clinton gave China most favored nation status, MRS Clinton was an attorney for Wal-Mart when they were in Arkansas. Taxing one side of the street shifts things. The reason Mr. Trump is leading is the population is angry, not exactly aware it's at Congress. When the Federal Reserve created QE there was talk of structural problems they meant Congress and their selling of tax policy to the highest bidder.
We the people need to change the rules that Congress operates under. The Federal Reserves hands were tied, they did the best they could.
Tampa-T profile picture
Agree with the view on Trump but don't agree the Fed 'did the best they could'.

So they needed to save the banks in 2009, ok. After stabilizing the banks they should have sat on their hands, no additional QE's. That would have prevented the Fed from blowing their 3rd market bubble since early 2000's. The lingering malaise that would have occurred would have forced Congress to deal with the remaining issues and maybe, just maybe, they would have done something and if not maybe the people would have applied the pressure to get them to act.
Justifying the Feds actions by blaming a do nothing Congress isn't right.
The Reader profile picture
Has become?

They have always been.
The FED has become a massive promoter of risk and massive speculation. The FED has also become an irresponsible cartel of banksters.
IncomeYield profile picture
Suddenly dropping rates all the way to zero and leaving them there for an extended period? What? Why?
Tampa-T profile picture
Many people don't understand or accept that the number one priority of the Fed is to protect its member banks. They are not motivated by the public good, they are motivated to protect the banks. We are now about to experience the 3rd bubble pop (2002, 2008, 2016) that were created by the Fed's actions.
Just because some people are highly educated that does not make them immune to making poor decisions. It happens all the time.

I find nothing shocking about their revelations. It was their plan from the beginning of QE to first protect the banks and then to artificially pump up the markets, so in that respect they followed their plan to the letter. Everything else they say is just noise. As intelligent as they are supposed to be, they evidently could not see what the result would be, hence, intelligent people make poor decisions, and thats giving them the benefit of the doubt. Placing trust in the Fed would be very misplaced.
seekingfoolishness profile picture
Great article Gary. Like the others I am shocked by these revelations. I must be simple but I cannot see hoiw the convoluted cause and effect reasoning of the FED can be justified by such a large group of highly educated people motivated by the public good. I am a committed capitalist but even I cant see how favoring the finance community and big corporations benefits the wider economy. If nothing else these last few years have hopefully killed off the idea that "trickle down economics" actually works. Though to be fair I think it was only ever taken seriously by economists and government egg heads
David Jennings profile picture
Seeking et al,
Take a 2 hour time out to watch the video in the link provided by 18214212 above. From the start, the Fed was and remains a creation of the banksters, by the banksters, for the banksters, such that they shall not perish from the earth.
If you are a committed capitalist then "end the Fed" as Rand Paul says.
SpanglerDavis profile picture
Exactly. Fed actions were to buoy house prices and 401(k) accounts. No wonder US companies kept their cash on the sidelines. Global trade is at a stand still and the Chinese keep stepping on their you-know-whats.
The Reader profile picture
Gary Gordon, good article.

Richard W. Fisher retired Inflation Hawk was just being honest. manya05 is correct however his comments regarding where the Markets are today seem pretty straightforward to me.
manya05 profile picture
Nothing new here, Bernanke spoke about the wealth effect intentions of Fed policy from day one.
Gary Gordon profile picture

I agree with you that Bernanke has implied the anticipated psychological effect with his description of a "virtuous circle" in November of 2010. That was nearly two years after QE first began. Not sure about Day One. (Note: The media have been using the "wealth effect" terminology and attributing it to the Fed's intentions for quite some time, of course.)

That said, Bernanke's description of a "virtuous circle," differs from Fisher's mea culpa of "front-loading an enormous stock market rally." For one thing, front-loading a massive leap in price appreciation comes with potentially severe consequences on the back end... not so virtuous.

What's more, Bernanke's "virtuous circle" from November 2010 - where higher stock prices and higher real estate prices lead to greater confidence about household wealth leading to increased consumption - is not an admission of bubble blowing. Fisher's candor is an acknowledgment that the Fed went too far... that the "wealth effect" is likely to lead to its evil twin, "reverse wealth effect." Indeed, Fisher went the extra mile in his interview to say that he did not support QE3.

Thanks for commenting... and for reading!

Retired Colonel profile picture
It is mistakenly believed that Winston Churchill once said: "The best argument against democracy is a five-minute conversation with the average voter." What he actually said involved a member of the US Federal Reserve on the subject of our economy.
"Even with vast amounts of data, and a lot of skill, many advisers are confused much of the time also, so you (we) are not alone.
At the same time, I would not put anything in the stock market unless I was willing and able to cope with and accept the considerable risks that are involved ALL of the time."

.......and at the conclusion of these kinds of CAUTIONARY speeches, what do they conclude? They conclude that the BULL MARKET IS STILL INTACT, yeah, that's what I heard on CNBC Squawk Box this morning, in other words: BUY THE DIP.
bmwmc profile picture
The "wealth effect" was only a part of the reason for the Fed's actions. It's all about the confidence game. People need to remember what was happening in 2008 and 2009. Nobody trusted anyone's books and there promises to pay on the contracts they signed. Counterparty risk was the theme in the financial markets and the implosion of the derivative markets seem imminent.

The Fed didn't just stoke the markets with QE it also lended 9 trillion to EU and other international banks and backstopped hundreds of billions of banks bonds: See Bank Of America and CiTIBank. That might have been necessary but what Fisher laments in really QE 2 and especially QE 3 which stoked another asset bubble. I think I saw one estimate that the Fed injected 26 trillion to restore confidence in counterparties. Most of that liability is still on the books and should thing turn sour again you can multiply the next bailout by a factor of 5. That will be the end of the dollar's reserve status for sure.
Im shocked by that revelation, absolutely shocked. Just when you thought you knew somebody(sarcasm included) Wonder what gave it away. Maybe cause the market hasn't moved since Oct 14 when the Fed stopped QE, just throwing that out there

The Feds massive intervention to events of 08 was not a plan but a reaction. Market participants are now letting the Fed know they don't plan on sticking around unless the Fed resumes QE and abandons its delusionnary rate hikes plan

Now back to June auto sales available 24/7 on all channels. Don"t forget to monitor Australian GDP numbers too. Where's Jon Stewart when you need him. At least he's funny
davidma11 profile picture
Very insightful. Fischer doesn't conclude that we are here.. ie that the Fed married to low rates for the foreseeable future like Japan. We won't see a real recovery until we get labor participation rate higher.
Well............I watched & listened to the interview.........I was stunned by the admission. Why did he do this?

Is he now trying to sink the markets or just what is the game plan here? Does it have something to do with "irrational exuberance" & he feels he has a moral obligation to tell the Retail Investor it's now time to get out of the market after getting them sucked in a few years ago?

However you slice it, there's a message here to someone. Anybody else with good ideas?
IncomeYield profile picture

If you listened to Yellen, she has been warning and saying to sell this bubble for some time now.
Batspeed10: Keep reading Gary Gordon, and also add Richard Shaw, Dividends4Life ,and Mycroft .
There are many others also in the almost pure dividend category that are renowned for their selections and advice.
Most of these are advising caution and patience, and some have given stocks and ETF's for a high quality buy list for the time they become better (more fairly) valued.
Even with vast amounts of data, and a lot of skill, many advisers are confused much of the time also, so you (we) are not alone.
At the same time, I would not put anything in the stock market unless I was willing and able to cope with and accept the considerable risks that are involved ALL of the time.
Stocks will become better valued during the coming year , but you must study and work hard, and be forever vigilant to take advantage of it if you intend to keep investing your own money without paid advice and help.
I don't know of any other way.
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