Bursting Bernanke’s Bubble

By Walter Kurtz, Sober Look

The last time we discussed the Credit Suisse Global Risk Appetite Index, it was headed for “euphoria” (see this post from May 21). Around May 22 something changed, and it was all downhill from there (see figure 1 below).

It was Bernanke’s first hawkish statement.

May 22; Bernanke: – We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook. If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings — we could take a step down in our pace of purchases.

Intentionally or not, the Chairman burst the market bubble just before it hit “euphoria”. It was clear that the Fed was becoming concerned about froth forming in fixed income markets (Bernanke spoke about it – see this post). It was time to end it.

The unfortunate outcome of this action however is that it remains unclear whether the economy would have been better off if QE3 was never launched at all. The next 12 months will be filled with uncertainties about the exit timing, rising rates, and shaky credit markets. Anecdotal evidence suggests that some banks are becoming jittery about growing their balance sheets in this environment. As a result, loan growth is already slowing. That can’t be good for business growth and hiring. When the dust settles, the economy may end up being in worse shape than it would have been if the Fed left it alone in August of 2012.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

More Posts - Website


  1. The problem is central banks are hard to prove wrong when it comes to this policy. You see no one can say what would have happened if they had not taken action and that is always there defence. They can always quite rightly claim that had they not done XYZ then the outcome would have been worse and of course you cannot disprove that because it never got the chance to happen. Great work if you can get it of course ,the type of job where you’ve definitely got ‘the force be with you’ at the other guys expense.

  2. What happens when there’s another inter-bank liquidity lockup and trust vaporizes? Is there any room left to move around or would it trigger the next leg down into this, essentially, on and off great depression since 1999?

    All they really did was preserve status quo, fold a few banks together and slap some makeup on scary balance sheets. Oh and load up on federal debt.

    This situation looks, ahem, not good. Perhaps I’m wrong?