The Fed is synonymous with creating bubbles, then denying their existence, and if their existence can’t be denied any longer, refusing to acknowledge them as an issue. When they implode and wreak havoc on the real economy, which they always do, the Fed then claims that no one could have possibly seen them. Given that its job is to create bubbles, it’s certainly not going to prick them.
But during Fed Chair Janet Yellen’s testimony to the Senate Banking Committee and in the Fed’s semi-annual Monetary Policy Report, suddenly there were feeble signs that some of the most glaring bubbles the Fed has so strenuously inflated since the Financial Crisis are now appearing on her radar.
“Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013,” the report warned, though the S&P 500, for example, reached that point in April 2013, so 14 months ago not 6 months ago, and has soared since. So, inaccurate and understated as it is, the point is quickly minimized further, perhaps to avoid triggering a market panic:
However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.
These “historical averages” of course include the bubbles the Fed has so calamitously blown, and which the S&P 500 blew past in April last year on its way to an even more glamorous bubble. But then she took a direct jab with her dull needle at the momentum stock sub-bubble:
Nevertheless, valuation metrics in some sectors do appear substantially stretched – particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.
Next target: the “ratios of prices to forward earnings” – one of the most doctored pro-forma fictional metrics Wall Street hype mongers engineer for our benefit and entertainment so that they appear as low as possible. They were “high relative to historical norms” – which include the prior bubbles.
And she took a separate jab with her dull needle at a segment of the greatest credit bubble in history, leveraged loans, and particularly the willingness by institutional investors, who’ve been driven to near insanity by the Fed’s ZIRP, to take on any risks to get just a little more yield. In the process, their blindly fanatical demand is driving down yields on even high-risk debt to ludicrously low levels – “‘the reach for yield’ behavior by some investors,” she called it.
Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened. For example, average debt-to-earnings multiples have risen, and the share rated B or below has moved up further for leveraged loans. The Federal Reserve continues to closely monitor developments in the leveraged lending market and, in conjunction with other federal agencies, is working to enhance compliance with previous guidance on issuance, pricing, and underwriting standards.
And then, in her testimony, she threatened to do the one thing hype mongers kept promising she’d never do, namely raising interest rates before the end of eternity (albeit preceded and followed by some prominent ifs).
If the labor market continues to improve more quickly than anticipated by the Federal Open Market Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.
When exactly? She dodged the question; almost all Fed officials expected a rate hike sometime in 2015, she said. Which is exactly what almost all Fed officials have been saying for months. Nevertheless, the phrase, “would occur sooner and be more rapid than currently envisioned” is now officially on the table. QE will most definitely be tapered out of existence in the fall. And the end of ZIRP is moving into view. This has the smell of serious business for investors. Seatbelts advised.
A small part of America has done exceptionally well under the Fed’s treatment. But average consumers are struggling. They’re “straining against rising prices on daily essentials” – despite Yellen’s rhetoric about inflation being low – and they are cutting back on things they want to buy, Gallup found in a new survey. Read …. Gallup Slams Lid On Hopes For US Economy