The Fed has accepted the “punch” and doesn’t intend to take it away

The Marriner S. Eccles Federal Reserve building is located in Washington, DC, United States on Tuesday, August 18, 2020.

Erin Scott | Bloomberg via Getty Images

The Federal Reserve has come a long way since the days of the “irrational exuberance” warning.

Former Fed chairman Alan Greenspan is known to have lit a torch in December 1996 over the wild dot-com speculation-sparked asset valuations that produced an unbridled bull.

It took three years for The Maestro’s warning to come true, but the statement is still considered a pivotal moment in market history when a Fed leader issued such a bold warning that went unnoticed.

Flash forward 25 years and the Fed’s stance is vastly different, although market valuations look very similar to when the dot-com bubble burst.

Central bank officials have repeatedly been given opportunities to exercise caution in valuing assets, and whenever they have largely passed. Aside from realizing that prices are higher than normal in some cases, Fed spokesmen have largely attributed market moves as the product of an improving economy supported by aggressive fiscal stimulus and low interest rates that will last for years.

Speaking a few days ago, San Francisco Fed President Mary Daly said the Fed has no intention of tightening policy, even in the face of roaring bull markets in multiple asset classes.

“We’re not going to take the punch away preventively,” said Daly during a virtual Q&A on Wednesday.

The metaphor “punchbowl” was interesting in that the term became a bit derogatory after the 2008 financial crisis.

Its origins in political circles go back to William McChesney Martin, the longest-serving Fed chairman, who held this position from 1951 to 1970. The role of the Fed, Martin said, was to act as “the custodian who ordered the punch removed just as the party was really warming up”. The statement outlined the cautious role the Fed should play in detecting signs of excess.

Removing the punch “does not work now”

However, Daly implied that such a duty either does not exist today or is not relevant to the current situation.

“That may have worked in the past, it definitely doesn’t work anymore, and we are determined to keep this punch bowl or monetary shelter until the job is completely and genuinely done,” she said.

Fed critics say the central bank failed to act as the “oversight” of the punch in the years leading up to the financial crisis, allowing Wall Street’s exotic investment vehicles, which benefited from the subprime credit frenzy, to fuel the global economy.

Those excesses were embodied in another famous quote from former Citigroup CEO Chuck Prince who said in 2007, a year before the worst crisis erupted, “As long as the music is playing, you have to get it.” up and dance. We are still dancing. “

That is the problem with the Fed. You’re really good at throwing a party, but there’s always a day after

Peter Boockvar

Chief Investment Officer of the Bleakley Advisory Group

Citi later became a major player in the crisis after taking serious write-downs on the toxic assets that tainted its balance sheet.

In the current scenario, the financial system is largely solid. During the economic crisis in Covid-19, banks were not an asset, they were an asset.

It is elsewhere where signs of excess might be found.

Stocks, Bitcoin, NFTs

The stock exchange is the easiest place to look at.

The S&P 500 has soared 75% since its March 23, 2020 pandemic low, compounded by low interest rates, an improving economy and hopes the worst of the crisis is over. The index is trading at a 22-fold forward gain, or slightly higher than when the dot-com bubble burst.

But there are also other areas.

Jack Dorsey, CEO of Twitter, testifies at the congressional hearing on March 25, 2021.


Bitcoin’s price is ten times higher than it was a year ago. Blank check companies have thrived on Wall Street as investors put cash into special-purpose acquisition vehicles without knowing exactly where they’re going. Non-fungible tokens are the latest craze, demonstrated in part by Twitter founder Jack Dorsey, who is selling his first tweet for $ 2.9 million this week.

At a press conference last week, Fed Chairman Jerome Powell at least nodded to what happened when he stated that “some asset valuations are elevated relative to history”. Otherwise, however, the party is open and the Fed is still pouring the champagne.

This has worried some investment professionals.

“People do stupid things”

“That’s the problem with the Fed. They’re really good at throwing a party, but there’s always a day after,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “There is always a time when the party ends and everyone is hungover. During this party, people get into accidents and do stupid things.”

For its part, the Fed said it will keep short-term rates near zero and limit its asset purchases to at least $ 120 billion a month until it hits a series of aggressive, if somewhat mushy, goals.

Central bank officials want the economy not only to run at full employment, but also to want the benefits to be shared across income, race and gender lines. To achieve this goal, the economy has to run hotter than normal for a while and the inflation tolerance has to be just above 2% for a period of time.

Boockvar said the policy was wrong and the Fed would regret having operated the policy with such a loose hand.

“Even other central banks understand that in hockey you go where the puck is going,” he said. “If you keep rates at zero for a long period of time and tell people to stay there it is no longer stimulating as it does not create a sense of urgency to act now.”

Other places on Wall Street, however, are primarily about going with the flow.

Mary Daly, President of the Federal Reserve Bank of San Francisco, poses after delivering a speech on the US economic outlook on November 12, 2018 in Idaho Falls, Idaho, United States.

Ann sapphire | Reuters

Bank of America advises its clients to be a little emptier than usual and instead invest in real estate – real estate and commodities in the more traditional sense, but also collectibles, agricultural and wooden goods, and even wine. The company views real assets as “cheap” and also correlates closely with rising inflation and rising interest rates.

“Real wealth is a hedge against war on inequality, inflation and infrastructure spending,” said Michael Hartnett, the bank’s chief investment strategist, in a recent statement. He said the investing class also benefited from “Bigger Government & Smaller World” issues.

From the perspective of the Fed, Daly said she saw “pockets of concern” on valuations, but overall she did not see financial terms as “frothy”.

“We really want to look at the financial stability indicators,” she said. “But we are evaluating it on a broad scale, not just one particular market. We are unable to control the movement of the stock market that [is] affected by an enormous number of things. “

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