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Since the Fed began its post-crisis monetary easing, a cult of second-guessers has emerged. The most extreme cry of “dollar debasement” or admonish that markets are doomed for hyperinflation. The more reasonable view, articulated by Michael Aronstein at a recent conference for financial advisors, is that near-zero interest rates and quantitative easing (QE) have distorted markets, but it is unclear when or how that will impact investors.
Aronstein identified his best candidate for a bubble that is due to collapse: corporate bond issuance.
“When I look around and ask what is the most gigantic excess that we’ve had since the Fed has embarked on QE and what’s really, really unusual? I can’t come up with anything other than the breadth and price of issuance of fixed-income securities,” he said.
Aronstein is president and chief executive officer of Marketfield Asset Management LLC and portfolio manager of the Marketfield Fund (MFLDX). He spoke Sept. 10 at Bob Veres’ Insider Forum.
The title of his talk was “The Fed’s Latest Mistake.” Indeed, Aronstein has been second-guessing the Fed for a while. He spoke at this conference two years ago, warning that risk-seeking by mutual funds – due to Fed-induced low interest rates – would turn into a liquidity crisis.
That crisis has yet to unfold, in part because bond-buying by the Fed and other central banks has meant that mutual funds own a very small slice of the overall fixed-income markets.
Aronstein is worried, though, because the Fed has a history of overdoing its application of monetary policy. Its latest mistake, he said, was to embark on a third round of QE in the summer of 2012 – and to continue that policy as long as it has.
“QE3 never should’ve happened,” Aronstein said. “And the fact that it happened is going to have consequences.”
Let’s look at Aronstein’s rationale for those claims.