Jason Zweig’s “The Bull Market Isn’t As Big as You Think” in The Wall Street Journal nicely illustrates how the stock market may not be as disconnected from economic reality as many suspect. However, the piece misses the monetary elephant in the room.
Since the introduction of Quantitative Easing (QE), value investing only outperformed growth strategies during four brief moments – as measured by S&P Value and Growth Indexes (see http://www.centerforfinancialstability.org/oped/Value_Investing_063020.pdf).
Not surprisingly, the relative outperformance of value versus growth strategies coincided with periods when the Fed curtailed its injections of monetary liquidity: 1) the end of QE1, 2) end of QE2, 3) end of QE3, and 3) the period of quantitative tapering.
Although the monetary policy response to the Coronavirus was needed, unintended distortions should be acknowledged and incorporated into future actions.
The implication for value investors is clear. Monetary largess is wreaking havoc with the investment strategy. For the public and officials, the propagation of valuation distortions starve a wide spectrum of deserving companies and industries access to capital. This will surely minimize private sector driven growth going forward.
View the report
Today my letter in the FT responds to Martin Wolf’s “Coronavirus crisis lays bare the risks of financial leverage, again.” Martin clearly highlights segments in capital markets creating fragilities before the recent shock.
The role of central bank policy distorting incentives in 2019 was absent. Skewed investing incentives began on December 18, 2018 – when the FOMC statement misread the global economy and markets and balance sheet expansion resumed.
“The faultlines of the crisis are complex and varied”
For more on Fed policy and markets after December 18, 2018 – see pages 5-6 of my Boston Economic Club remarks
In the middle of financial crises, one often hears “Now What?”
At the Boston Economic Club, I discussed the evolution of three vectors (policy, markets, and the Coronavirus). These vectors offer officials a blueprint to stabilize markets and asset managers a roadmap for investment decisions. To be sure, the Coronavirus is only part of the reason behind the fierce market response.
Six big “Now Whats” or action items are discussed.
For full remarks:
We thank Otmar Issing for sending a recent “Memorandum on the ECB’s Monetary Policy” in response to CFS distributions. To be sure, the broad content of the message was covered in the financial press. However, meaningful nuances and details are only apparent with a full read. Hence, it may be of interest to CFS friends.
Hervé Hannoun, Former First Deputy Governor, Banque de France, Paris
Otmar Issing, Former Member of the ECB-Executive Board, Würzburg
Klaus Liebscher, Former Governor Oesterreichische Nationalbank, Vienna
Helmut Schlesinger, Former President Deutsche Bundesbank, Oberursel
Jürgen Stark, Former Member of the ECB-Executive Board, Frankfurt
Nout Wellink, Former Governor De Nederlandsche Bank, Amsterdam
Judgement shared by:
Jacques de Larosière, Former Governor Banque de France, Paris
Christian Noyer, Former Governor Banque deFrance, Paris
The full memorandum is available at
Wishing you the best into the Holiday Season and New Year!
CFS is delighted to share Robert Hormats and Yves-Andre Istel’s personal views on “Inequality Perils from Lower Rates.” They contend that:
- Low interest rate policies have become increasingly ineffective in fostering equitable growth.
- Negative effects of ultra‐low rates have been underestimated and are greater than generally thought, especially in increasing inequality.
- Therefore, a new mix of monetary/fiscal policies with a long-term structural focus is called for.
Yves and Bob have been thoughtful and engaged with CFS. Robert Hormats is the former Undersecretary of State for Economic Growth, Energy, and the Environment. Yves‐Andre Istel is a Senior Advisor to Rothschild & Co.
The full report is available at
I had the pleasure of presenting “Monetary Policy Paradigm Shifts” as well as delivering conference summary remarks at a discussion hosted by the Shanghai Development Research Foundation (SDRF). The conference hosts beautifully structured the inquiry regarding monetary policy across three areas. Corresponding conclusions follow:
– “Modern Monetary Theory (MMT)” is neither modern nor monetary. It is theory. CFS has avoided discussing this topic; however, threads seem to be drifting into mainstream thinking. MMT has already been tried and performed poorly. Our assessment rests on studies and empirical evidence including Gail Makinen’s “Studies in Hyperinflation & Stabilization” published by CFS in 2014.
– “Fundamental changes in theory and policy today” are a function of three policy miscalculations since 2002. Monetary mistakes in the past have paved the way for more experiments and the surfacing of ideas such as MMT.
– “The effect on global markets and economies” is to skew incentives for savers and investors, distort market signals, and limit growth.
Although tricky, a slow and careful restoration of normalcy is essential. It is today’s critical constrained maximization problem.
View the remarks at www.centerforfinancialstability.org/research/ShanghaiDRF_111819.pdf
We are delighted to share Jacques de Larosière’s latest thinking on “The Monetary Policy Challenge.” Jacques thoughtfully evaluates the 2% inflation target so prevalent in advanced economy central banks today. His assessment is based on careful examination of structural determinants of inflation as well as distortions arising from equilibrium inflation consistently falling short of its target.
He chronicles unintended consequences from excessively accommodative monetary policy – which stretch from a weakening of the banking system, deterioration of pension institutions to the proliferation of zombie companies.
“Who could reasonably believe that lowering already so low rates would strengthen growth?”
He notes that it “is not too late to act” and offers concrete solutions.
The full report is available at www.CenterforFinancialStability.org/research/de_Larosiere_MPC_112519.pdf
Jacques de Larosière is the Chairman of the Strategic Committee of the French Treasury and Advisor to BNP Paribas. He previously served as the President of the European Bank for Reconstruction and Development (EBRD), Governor of the Banque de France, and Managing Director of the International Monetary Fund (IMF).
CFS Special Counselor and Johns Hopkins professor Steve Hanke delivers the John Ise Distinguished Lecture at the University of Kansas – moderated by CFS Director of Advances in Monetary and Financial Measurement and KU Oswald Distinguished Professor of Macroeconomics.
Hanke and Barnett explored monetary systems throughout the world, tariffs and their effects on trade deficits, abolishing time zones and changing the calendar, plus “everything under the sun.” View video
The CFS co-organized a “Future of the Global Monetary and Financial System: 75 years after Bretton Woods” roundtable with the Euro 50 Group. The roundtable gathered high-level personalities coming from all over the world.
My final takeaways are:
- First, the time is right for the Bretton Woods Institutions (BWIs) to exercise greater leadership. The IMF is uniquely situated to help govern effectively and navigate in an increasingly complex and challenging world. But, with greater complexities and areas of engagement comes the risk of mission creep.
- Second, the international monetary and financial system would benefit from a move with great purpose over time to a more rules-based system.
- Third, policy actions today would benefit from a system-wide and longer-term perspective.
A roundtable summary and conclusions are available at
The conference agenda and bios are available at
CFS is delighted to publish a thoughtful piece by Mickey Levy – Berenberg Capital Markets, Chief Economist for the Americas and Asia and Shadow Open Market Committee member.
In “Monetary Realities Facing the ECB, Fed and BoJ: More Easing Won’t Stimulate the Economy,” Mickey digs into the monetary policy transmission channels to assess growth implications of policy alternatives and considers the risks of excessive reliance on monetary easing.
He illustrates why further eases may not be the elixir for future growth. The paper is available at www.CenterforFinancialStability.org/research/Monetary_Policy_Realities_072919.pdf.