No bullets left…

We speak often about the fact that all the stimulus since the GFC has created market bubbles without fundamentals.  i.e. shares, that have poor or declining forward earnings, are increasing in price (demand) as money is forced to search for yield; or property prices continuing to surge, despite sky high price:earnings with rising unemployment and low/zero wage growth expectations, in our near zero interest rate environment.  We’ve seen time and time again that when the US shares have sizeable corrections someone from the Fed waltzes in and talks up the prospects of continued zero rates or starting QE4.  BUT last week US Fed Chair, Janet Yellen had this to say…

"But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC [Fed ‘rates & money printing’ committee] might be concerned about potential costs and risks associated with further asset purchases [QE]."  

That main stream media hasn’t jumped on this is astounding.  But first some further context… The US Fed was formed in 1913.  In the near century to 2007 they created $800b.  When the GFC hit they started QE (Quantitative Easing).  In the 5 years after the GFC, they ‘printed’ $3.3trillion.  In other words they created almost as much money in each of the years since the GFC as they did for the nearly 100 before it.  Their balance sheet now sits at $4.1t ($4,100,000,000,000).  

What Yellen is saying above is that if the economy falls again, and their ‘words’ don’t fool the market back up (please refer to “The Boy Who Cried Wolf” reference material) they have nowhere to go with rates and are unable to launch QE4 as they already have too much debt on their books.  Of course they can join the negative rate bunch in Europe but one wonders how much that will really help when it is the clearest sign all is broken.  It certainly seems like the current central bank fuelled bubble has run out of bullets.