Tags: Olsen | Fed | QE | bubble

Barclays' Olsen: QE End Will Make 2000 Bubble 'Look Like a Day at the Beach'

Thursday, 18 Jul 2013 08:20 AM

By Michael Kling

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The end of the Federal Reserve's bond-buying stimulus will make the dot-com bubble of the 2000s "look like a day at the beach," says Hans Olsen, chief investment officer of Americas at Barclays.

"When you think about how much you pay for a dollar's worth of sovereign debt income in the United States or investment grade debt, if you create a PE [price-earnings] multiple out of it, that would make the stock market bubble of 2000 look like a day at the beach," Olsen tells CNBC.

"It's really quite remarkable."

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed should end its stimulus effort in which it is buying $85 billion of Treasury and mortgage bonds a month, Olsen argues.

"Let the market start to price things based on fundamentals again rather than money printing. The sooner we get back to a market pricing, the more sustainable it becomes," he notes, saying the Fed's quantitative easing (QE) has created an asset bubble.

Fundamentals to not support the recent boom in stock prices, Olsen says, adding that prices are up 17 percent, while earnings are up just 2.5 percent.

For now, Olsen expects "more of the same" from the Fed. The central bank will continue QE as the economy continues to improve at a frustratingly slow pace. Still, the economy is improving fast enough for the Fed to thing of winding down QE.

Talk of the Fed inflating bubbles has become common in financial circles.

Many initially warned of a bubble in bonds, but others are warning of a bubble in stocks.

However, although stocks are higher than they were at the end of the 1990s, corporate profits are more than 2 ½ times higher than they were when the 1990s dot-com bubble burst, notes New York Times columnist Paul Krugman.

Frequent warnings of bubbles may be partly due to wishful thinking, Krugman says. For some reason, many people in the financial industry do not like Fed Chairman Ben Bernanke and want to see his easy-money policies fail.

"As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy."

Arguments for bubbles in stocks or bonds are weak, Krugman concludes. There's no basis for believing we face any significant bubbles and no reason to let worries about hypothetical bubbles take precedence over attempts to reduce unemployment.

"Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job," Krugman says.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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