Thanks to QE, bubble of 2000 like 'day at beach'

CNBC

Even as global markets continue to be held hostage over the prospect of the unwinding of the U.S. Federal Reserve's massive monetary stimulus, Hans Olsen, chief investment officer of Americas at Barclays, argues that the tapering has to happen, and the sooner, the better.

His comments come as Fed chief Ben Bernanke is set to deliver his semi-annual testimony to a U.S. Congressional panel later on Wednesday, and anticipation is running high over whether he will deliver fresh clues on the timing of tapering.

(Read More: Will Bernanke taper talk rock the markets again? )

"When you think about how much you pay for a dollar's worth of sovereign debt income in the United States or investment grade debt, if you create a PE multiple out of it, that would make the stock market bubble of 2000 look like a day at the beach. It's really quite remarkable," Olsen told CNBC Asia's "Squawk Box" on Wednesday, referring to the dotcom bubble that burst in 2000.

"Let the market start to price things based on fundamentals again rather than money printing. The sooner we get back to a market pricing, the more sustainable it becomes," he added.

(Read More: Why stock markets can trust the Fed )

While Olsen is overweight on U.S. equities, he says the run up in stock prices does not reflect fundamentals either.

"[U.S. stocks] are up close to 17 percent on a 2.5 percent earnings rise - it's hard to make the case that that just can be done on fundamentals alone. It's really money in motion, [if] you push money out of the fixed income complex, where does it go? It goes to the equity market in search of a better yield."

Olsen expects Bernanke's testimony to be a "study in caution" where the central bank governor will likely reiterate remarks made last week, when he assured markets that bond buying will be wound down when the economy is strong enough, that monetary stimulus will stay in place for now and that there are no plans to raise short term interest rates.

(Read More: Will Bernanke surprise markets again this week? )

"It's going to be this very studied, very much Fed speak. I don't think we can expect much, except for more of the same," Olsen said. "The U.S. economy is operating along an envelope that is frustratingly slow relative to our prior history and fast enough for the Fed to be thinking about an end to QE," he said.

Vishnu Varathan, senior economist at Mizuho Corporate Bank agrees, adding that Bernanke will likely stress on the economic conditionality of monetary policy.

(Read More: Fed speak has some expecting QE end in December )

"Thus, markets should back away from the notion of imminent, brutal or guaranteed QE taper. Above all, he will stress that interest rates will remain low long after QE is halted. And the idea of a higher bar for rate hikes could come through," Varathan said.

-By CNBC's Ansuya Harjani



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