The Cost of Delusion—Asset Prices & Monetary Policy in An Irrational World
The comments above & below is an edited and abridged synopsis of an article by Chris Whalen
Almost as soon as it started, the excitement surrounding earnings for financials in Q3 2017 dissipated.
Results for the largest banks, including JPMorgan, Citigroup and Wells Fargo, all disappointed, even based upon the modest expectations of the Sell Side analyst cohort.
As with many other sectors, there was little excitement in large-cap financials, just slightly higher loss rates on loan portfolios that are growing high single-digits year over year. Equity valuations are up mid-double digits over the same period.
The explanation for this divergence between stock prices and the underlying performance of public companies lies with the Federal Open Market Committee. Low interest rates and the expansion of the Fed’s balance sheet have driven asset prices up by several orders of magnitude above the level of economic growth.