Fed’s Bullard: ‘The Bubble Was Developing Under Our Noses’

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Perhaps accidently wiping out in one fell swoop six years of carefully orchestrated and minutely maintained Fed propaganda, St. Louis Fed President James Bullard admitted to reporters on Monday after a speech in Palm Beach, Florida, that the Fed had dropped the ball in dealing with the prior bubble, that the Fed’s tightening cycle of 2004-06 was “too methodical and did not react sufficiently to economic developments.”

The Fed hadn’t been focused on the ballooning bubble but on the calendar, he said. The very bubble that Alan Greenspan, who was in charge at the time, didn’t see, couldn’t have possibly seen, and denied ever seeing? Yup, that one. “So, the committee was tightening policy,” Bullard said, “but the bubble was nevertheless developing under our noses.”

And the bubbles that are now “developing under our noses,” to use Bullard’s term? Numerous indices have hit all-time highs, often beating prior bubble highs by a wide margin. So here are a few of these craziness indicators. Surely, Bullard and his colleagues at the Fed must have noticed them, especially since some of these indicators are produced by the Fed itself.

  • The Financial Stress Index, issued by the St. Louis Fed, hit an all-time low in the latest reporting week, beating the low reached in February 2007, a time when the foundation of the financial system was already cracking. Extremely low “financial stress” means even the most reckless decisions are getting funded and the riskiest crap is getting sold no questions asked as risk has been eliminated from the calculus [Last Time this happened, The Financial Crisis Broke Out].
  • Margin Debt spiked from record to record until it hit $465.7 billion in February, or 2.73% of GDP, the highest ratio ever! But in the following two months, it dropped 6.1%; the last two times it dropped after a magnificent spike was in March 2000 and July 2007, with terrific results [This Happened Twice Before, And Each Time Stocks Crashed].
  • The VIX volatility index dipped on Friday to the lowest level since February 2007 and remains at half of its historical average. It’s a sign that market participants don’t expect big price movements, and if the selling starts, no one is prepared. Hence, the notion of utter “complacency.”
  • Unprofitable IPOs – companies that go public without having made a profit, such as Twitter, and often without a clear picture of how they’ll ever make a profit – were back at record level in the first quarter. The record – 84% of all IPOs – was set during the dotcom bubble in Q1 2000 just before all heck broke lose.
  • The spread between junk-bond yields and Treasuries is the tightest since October 2007, the craziest of all junk-bond times when “Merger Mondays” – which are now back in full bloom – were adding spice to TV news shows. Another signs that investors are simply no longer demanding compensation for the risk they’re taking.
  • A record $355 billion in new leveraged loans – the riskiest loans out there – were issued last year in the US, and this year started out just as hot. Insatiable demand by desperate investors driven to near insanity by the Fed’s interest-rate repression.
  • Banks have issued a record amount of commercial loans, now $10.5 trillion.
  • Home prices have surpassed their prior bubble highs in numerous cities, including San Francisco, though those bubble prices are now running into the buzz saw of reality.
  • Corporate profits as percent of GDP – how much profit companies can wring out of the economy by, among other strategies, keeping real wages down – has hit all-time highs for two years in a row.
  • Ha, and don’t even mention Money Supply, which has rocketed into the stratosphere.
  • Not to speak of stock market indices bumbling from one all-time high to the next without a 10% correction in years, while corporations borrowed crazy sums and bought back record amounts of their own shares, to where in Q1, according to CapitalIQ, they’ve become the most prolific buyer of stocks.

And then, there is the whole craziness in San Francisco and the Bay Area that is spreading to other parts of the country. The sums of money being thrown around are breathtaking. And not just Facebook’s paying $19 billion for a texting app maker with 55 employees and a trickle in revenues, or the $18.2-billion “valuation” for Uber – maker of an app that provides a mix of unregulated taxi service and expensive hitch-hiking. It’s getting so crazy they’re even joking about it on local talk radio.

So Bullard’s speech focused on “how far” exactly the FOMC was still from its “macroeconomic goals.” He had his own math. The FOMC is “closer to target” in terms of inflation and unemployment than it has been about 75% of the time since 1960, he said.

To target – that’s the thing. The Fed’s policies of printing $4 trillion in five years and imposing its ZIRP relentlessly on the country – in conjunction with similar actions by other central banks – has created a tsunami of money that washed over the land, made a small group of people immensely rich, inflated all sorts of record-breaking bubbles, and caused the craziness indicators to spike “under our noses.”

During the last bubble, the Fed did eventually tighten, even if belatedly and timidly, and not until after it had nurtured the bubble to its full glorious bloom to where its implosion took down the financial system. This time around, the bubbles have far outgrown those of yore. Yet the Fed is still printing money. And raising interest rates just a tiny bit won’t even be discussed seriously until next year. But unlike the prior bubbles that blew up the financial system, today’s bubbles are different. They’re a sign, apparently, that the economy is healing and getting back to normal.

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