Bloomberg reports that central bankers are not seeing a bubble in equities despite the ultra-easy monetary policies that have been implemented around the world.
Policy makers from the Federal Reserve and the Bank of England said they see few signs of equity price bubbles in the U.S. and the U.K., countering criticisms record stimulus is stoking excessive risk-taking.
“I don’t think we’re in that kind of territory that obviously makes these asset prices unsustainable and at a bubble level,” Bank of England policy maker David Miles said today during a panel discussion at the Boston Fed. While “this is something we have to keep monitoring” at the Fed, “I don’t see” these risks now, Minneapolis Fed President Narayana Kocherlakota said to reporters after speaking at the same forum.
Kansas City Fed President Esther George did warn of risks though earlier this month.
“We should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances,” George said on April 4 in El Reno, Oklahoma. “Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble.”
Criticism of central bank policies have been stronger from non-central bankers.
For example, the recent action by the Bank of Japan has triggered the following response reported by Bloomberg:
The Bank of Japan’s “huge bet” by boosting quantitative easing won’t turn the economy around and is instead sending the nation toward default, said Takeshi Fujimaki, former adviser to billionaire investor George Soros...
“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”
Another critic of quantitative easing has been fund manager John Hussman. In his latest article, he notes an “accelerating eagerness to buy market dips since 2010”.
This tendency reflects a broadening consensus among investors that there is no direction other than up, and that any correction, however small, is a buying opportunity. As investors clamor to buy ever smaller dips at increasing frequency, the slope of the market’s advance becomes diagonal or parabolic. This is one of the warning signs of a bubble...
Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects...
While Hussman thinks that most assets have become overvalued as a result of quantitative easing, he notes that the recent fall in gold may have made gold shares attractive.
I should note that last week, spot gold fell to 1486, and the Philadelphia gold index (XAU) declined to just 116, down nearly 50% from its 2011 peak. Importantly, this places the ratio of the spot gold price to the XAU at the highest level in history. This fact does not, in and of itself, imply near-term gains in the XAU. However, looking out over horizons of a year or more, an elevated gold/XAU ratio is a strong indicator of subsequent prospective total returns in gold shares.
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