Subsidizing Moral Hazard

Those days are gone forever
I should just let them go
--Don Henley

Stan Druckenmiller observes that just because stocks look favorable vs bonds does not mean that they are actually cheap. Real estate, stocks, bonds are all being subsidized by the policies of the Federal Reserve.

The commentator asks him whether money managers in general might not agree with him but feel that, unless fund managers are long equities in an environment where the Fed is saying 'take risk,' then investors will pull their investments.

Ah, the potent combination of career risk, the agency problem, and moral hazard. The Fed is subsidizing risk-taking, and if you are not taking risk then you will be out of a job if prices go higher.

As Druckenmiller observes, the subsidy game can't go on forever.