Fisher, Richard

Together with the healthy rejuvenation of the balance sheets and equity prices of investment grade companies, we have seen what I consider to be a manifestation of an indiscriminate reach for yield, a revival of covenant-free lending, and an explosion of collateralized loan obligations (CLOs), pathologies that have proved harbingers of eventual financial turbulence.

Noticeably affected by QE3 have been the nominal yield levels of subpar credits and their spreads relative to investment-grade issues. Some 40 percent of newly issued CCC credits have negative cash flows.[2] And yet junk bonds have been trading at or near record historic low yields both in absolute terms and as measured by spreads over investment-grade credits. I worry about this as a risk that has been propagated by QE3, though I do not believe it is the Feds job to rescue reckless investors from the errors of their ways.

The stock market bottomed in March 2009 and had already more than doubled by the time we initiated QE3. It has since risen by another 40 percent; equities have, all-in, tripled in price since the lows of 2009. Only time will tell if stocks have risen to unsustainable heights and, if so, how deep a correction might be needed to bring them back to sustainable valuations.