Former Fed Governor Kevin Warsh last week slammed the Fed, during a speech delivered at the Hoover Fed Conference, admitting the central bank had no real "normalization" strategy aside from jawboning, and accused his former co-workers of potentially terminal groupthink.
Changes are in order to how the Fed organizes itself, conducts its business, deliberates policy choices, and makes its monetary policy decisions. In short, deliberations should be more robust, and decisions less constrained. The existing governance structure reinforces a groupthink of the guild. It places the Fed at considerable institutional risk when the next crisis strikes. And it makes the next crisis more likely to be more harmful to the economy.
As a former Fed governor, he would know. On Monday, Warsh appeared again at the Ira Sohn conference in his capacity as consultant to Stan Druckenmiller’s family office, and was the third in a row just this morning (after Goldman and Citi) to warn that he believes the market is risky when measures of risk are as low as they are currently (the VIX is currently trading at 9.72, and grinding lower).
Warsh also cautioned against the widening state of herd mentality and said there is a uniformity of opinion about the state of economy, inflation and growth, and repeating his comments from Friday, also said that "the last time I witnessed such a consensus was about 10 years ago", or just before the last financial crisis, which was enough to make him pause.
But most concerning to equity bulls, the former Fed govrnor warned that asset prices are not ready for a downside shock, and concluded that the Fed "will be unable to pull levers of monetary easing in next downturn" if it lacks institutional credibility. We doubt the Fed is very worried about its credibility as long as the market keeps rising higher.
Finally, Warsh did not have any specific investing advice but said that the main indicator for the future state of the economy are capital expenditures, which will be a leading indicator over next 12 months for potential real economic growth. Since most companies continue to opt out for buybacks and dividends instead of investing in their business and boosting capacity (there is simply not enough demand) expect to see a continuing deterioration in the economy "offset" by new all time highs in the S&P500.