Zerohedge has done a blog post or two based on the transcripts of FOMC meetings of 2012 in which the Federal Reserve resorted to QE3. You can see the blog posts here and here. Of course, Jeffrey Lacker dissented in the September meeting when the Federal Reserve decided to purchase mortgage backed securities to the extent of USD40bn per month on top of the USD45bn of Treasury Securities it was already purchasing. It would have been interesting to read his comments. But, correctly, the market had decided to focus on what Powell said in those meetings. Check out the blog posts by Zerohedge. He had spoken well. It makes his stewardship likely interesting.
More than his remarks that were highlighted by Zerohedge, these remarks caught my attention and I will explain why:
In the new deal market, there’s a large industrial deal that I’m pretty familiar with that is being done at 6¼ times leverage in the next few weeks. It’s rated CCC by both Moody’s and S&P. In most ordinary markets there is no CCC market for paper, and this is being done at 6¼ times leverage with a weighted average cost of capital of under 6 percent. So private equity firms are more focused on the level than they are the spread, and under 6 percent for that kind of paper is an all-time record, again, very reminiscent of a bubble period. So demand for leveraged loans and high-yield bonds is far in excess of supply.
This can be expected to continue. On the bright side, you do not yet see the return of that leveraged mark-to-market structure that was so unstable in the crash, and you also don’t see very large deals getting done yet. There’s sort of a cap around $5 billion, and you don’t see dealers committing their balance sheets. I think all three of these things are positives for holding down the systemic risk aspects of this emerging bubble, if you will. But we’ve seen the competitive dynamic develop into a race to the bottom before, and so these markets are definitely worth keeping a close eye on.
He made these observations in the FOMC meeting of October 2012. See p. 143 of the link. What is interesting is that if he saw leverage as a risk in 2012, how much of a risk would it be in 2018?
Hence, we have no idea of what and how much would unravel when asset bubbles burst.