CNBC Star Sees Fed’s Easy Money Leading To Corporate ‘Laziness’

By John Hilton

The Wall Street party is going to end eventually, and careless executives and starry eyed traders might be accelerating an economic calamity, said CNBC "Fast Money" panelist Guy Adami.

Appearing on the inaugural 2021 Allianz Global webcast Tuesday, Adami did not hold back his concerns about corporate recklessness. Fueling that recklessness is a Federal Reserve that has been "extraordinarily accommodative" over the past 12 years or so, Adami said.

"It's made corporate America extraordinarily lazy," he added. "What it's done for a lot of companies, they've taken their eye off the ball. They're able to borrow money cheaply, they're able to pay a dividend and buy back their stock. Their stock goes higher and everything appears to be going well.

"But the world might be passing them by and the laziness that free money creates has put them in an untenable position."

Adami was joined on the webcast by Allianz executives Peter Lefkin, senior vice president of government and external affairs, in Washington, and Ludovic Subran, chief economist, from Paris.

One of the original "Fast Money Five" panelists from its 2007 premiere, Adami is a 35-year veteran of Wall Street. He began his career at Drexel Burnham Lambert where he worked on the floor of the New York Mercantile Exchange in the mid-1980s.

'That Concerns Me'

The decades since have seen several quick-money schemes come and go, from illegal junk bonds in the 1980s to collateralized mortgage securities that led to the economic crisis of 2008-09. American investors are flocking again to the market, Adami noted, in reckless ways that should raise alarms.

In 2020, there were 10 million new trading accounts created, Adami said, 6 million through Robinhood. The Robinhood app and website makes it much easier for more people and those of lesser financial means to buy and sell stocks and ETFs.

"For the majority of people, outside of a couple days here or there, they've never really seen the market go lower," Adami said. "And that is a wonderful thing for wealth creation. But it leads to this level of complacency. Now people are borrowing money to trade. You have to wonder at what point do people start pushing themselves further and further down the risk curve. That concerns me."

The Control Rods Are Out

The Federal Reserve has assumed a greater role in managing the economy, Adami said, and the results might be contributing to a growing bubble. At best, the Fed might not be entirely correct with its financial readings, he added.

To illustrate his point, Adami analogized the Fed economy management to the Chernobyl workers removing the control rods during a test of reactor No. 4 on April 25, 1986. The workers removed the rods, in violation of safety policy, because the reactor's power levels were not rising as expected.

One hour later, a massive power surge caused the reactor to explode and the radiation release killed dozens of workers and firefighters. The long-term health impacts affected thousands of Russians from the surrounding community.

The analogy fits how central bankers are managing the economy through the pandemic and other challenges, Adami said.

"I think central bankers globally, have taken out the control rods," he explained. "They're looking for that reaction ... in terms of inflation, and in terms of velocity of money, and they're just not getting it. My concern is one day they're going to get it, but they're not going to be able to control it."

The Fed uses inflation as a key indicator of its effectiveness managing the money supply, but it might not be measuring inflation accurately, Adami said.

"If the Fed were to measure inflation properly, in my opinion, I think it would be well in excess of their target number," he added.

2% Inflation

The Fed has said its definition of price stability was to aim for 2% inflation, as measured by the Personal Consumption Expenditures price index. But Fed policies over the past dozen years continue to diminish the value of the dollar, Adami noted.

"So each day, the dollar goes lower. By definition, that's inflationary," he said. "And we've seen a precipitous drop in the U.S. dollar over the last six to nine months, basically predicated on everything that we've seen going on with our Federal Reserve. That's problematic."

The harsh truth is that economic downturns are not bad, Adami said. They are a natural part of the economic cycle. "Corporate Darwinism" is not a bad thing, he added, and is needed if the economy is to remain nimble and robust.

Fed Chairman Jerome Powell likely recognized the need to let the economy cycle through its natural ups and downs, Adami said. Throughout 2018 and early 2019, Powell and the Fed tried to normalize its Federal Funds Rate, the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight.

"I think he was one of the first Fed chairs since Paul Volcker who actually got it," Adami said. "He was telling folks, 'You know what? This has gone on too long, too much, we're going to have to start to extract ourselves from the equation.' And I think he was on to something."

However, the market began showing weakness, and Powell received significant pressure from President Donald Trump to lower the Fed rate. Within months, the rate returned to near zero, where it remains.

Adami made it clear he is not predicting a recession, or a market crash. In fact, he does expect "tremendous things" from the economy during 2021. But he has concerns.

"As you sit and think about the market, and you think about new businesses over the next couple of weeks, think about some of the things that I said, and think if it makes sense," he told the audience.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.