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BookmarkPerhaps worries about the Fed’s quantitative-easing exit, which have triggered sharp losses for Japan stocks andbroke a four-week winning streak for Wall Street, aren’t exactly being overplayed.
“We’re expecting too much of the Federal Reserve, and Bank of Japan, and I’m growing increasingly concerned that we’re not going to find an easy and smooth exit out of QE in the U.S. or for that matter in Japan.”
That was Charles Dallara, the former managing director of the Institute of International Finance, a major lobby group for financial institutions, speaking to CNBC on Monday. Dallara was lead negotiator for private bondholders in talks to restructure Greek debt last year during the height of the European debt crisis.
Dallara, now chairman of the Americas at investment management company Partners Group, says he was a firm supporter of quantitative easing in 2009, 2010 and 2011, but now says the question must be asked as to whether that easy money has gone on too long and if the seeds are being sown for a “sharp correction not just in bond markets, but in stock markets.
“We’re running out of room for the Fed to be a dominant part of the solution of our recovery…in many ways it’s been the only game in town as the U.S. has struggled to get a handle on our fiscal deficit…frankly, I think we have a growing risk of a severe correction in the bond and stock markets.”
Some say perhaps Fed Chairman Ben Bernanke was testing the waters last week and trying to see just how much the markets would react to talk of slowing bond purchases “in the next few meetings.” Read Bernanke dares you to buy stocks Speaking at the World Economic Forum in Jordan, Nobel prize-winning economist Joseph Stiglitz said in an interview that it’s too soon to call a halt to that stimulus as it’s “still in the recovery phase.”
As for Japan, Dallara likens decisive monetary action by the Bank of Japan to “rolling the dice with the future risk of inflation.” The Nikkei Stock Average JP:NIK +0.08% fell 3.2% on Monday, though recovered from a much-worse fall of 4% earlier. A volatile prior week saw it plunge more than 7% last Thursday.
Writing in the FT on Monday, Gavyn Davies, a former economic policy advisor to No. 10 Downing Street and former head of Goldman Sachs’s global economics department, says neither bonds nor equities are in a bubble, but easy central bank monetary policies have reduced returns to be expected in the future. That process hasn’t advanced anywhere near as far in equities as it has in government bonds and credit, he says.
