Now Even a Fed Dove Homes in on the “Everything Bubble”

Bonds, junk bonds, spreads, commercial real estate, leveraged loans, over-leveraged companies… all get named as risks to the banks. This is why tightening will continue.

“If we have learned anything from the past, it is that we must be especially vigilant about the health of our financial system in good times, when potential vulnerabilities may be building,” explained Federal Reserve Board Governor Lael Brainard in a speech in Washington, D.C., this morning.

This was a reference to a time-honored banker adage, now mostly forgotten after nearly nine years of easy money: Bad deals are made in good times.

Brainard fills one of the seven slots on the Board of Governors. Two slots are filled by Chairman Jerome Powell and by Randal Quarles. Four slots remain vacant, waiting for Trump appointees to wend their way. She is a strong “dove” in the world of central banks, and she just pointed at why the Fed is tightening – and will continue to tighten: the Everything Bubble.

After rattling off a litany of indicators showing why and how the economy’s “cyclical conditions have been strengthening,” she added this gem, there being nothing like Fed-speak to make your day: “Currently, inflation appears to be well-anchored to the upside around our 2 percent target.”

“Well-anchored to the upside” of the Fed’s target – and then she moved on to the “signs of financial imbalances.”

“Financial imbalances,” in Fed speak, are asset bubbles, a phenomenon when prices are out of whack with economic reality. In a credit-based economy, assets are collateral for debt. And inflated asset prices put the financial system, meaning the lenders, at risk when those asset prices deflate. Since the Fed has to take care of the financial system, and since it blew up so wonderfully last time due to asset bubbles deflating, the Fed is right to be worried about it. At first the hawks, the rare ones; and now even the doves.

And she goes on, sticking all the while to the central banker rule of never calling anything in front of them a “bubble.” They say, prices are “elevated”:

Our scan of financial vulnerabilities suggests elevated risks in two areas: asset valuations and business leverage.

First, asset valuations across a range of markets remain elevated relative to a variety of historical norms, even after taking into account recent market volatility.

In other words, even after the mini-selloff since the end of January, prices are still too “elevated.” And then she goes into my favorite metrics, the bond market bubble where investment-grade yields are low and junk-bond yields are ludicrously low, with paper-thin spreads or risk premiums that don’t pay investors for the massive risks they’re taking, the bubble in “leveraged loans” and collateralized loan obligations (CLOs), and the bubble in commercial real estate, particularly in multifamily and industrial:

Corporate bond yields remain low by historical comparison, and spreads of yields on junk bonds above those on comparable-maturity Treasury securities are near the lower end of their historical range.

Spreads on leveraged loans and securitized products [CLOs] backed by those loans remain narrow.

Prices of multifamily residential and industrial commercial real estate (CRE) have risen, while capitalization rates for these segments have reached historical lows.

It is rare to hear a Fed governor, and a dove in particular, list some of the biggest elements in the Everything Bubble as a concern. And the concern is not how to maintain it and keep it inflated; but how to tamp down on it gradually.

And then she gets into “business leverage,” in other words, companies with too much debt – which has turned into a record problem:

Second, business leverage outside the financial sector has risen to levels that are high relative to historical trends. In the nonfinancial business sector, the debt-to-income ratio has increased to near the upper end of its historical distribution, and net leverage at speculative-grade [junk-rated] firms is especially elevated.

I added the bold below:

As we have seen in previous cycles, unexpected negative shocks to earnings [though they’re actually not unexpected, as we’ve seen in the brick-and-mortar meltdown] in combination with increased interest rates could lead to rising levels of delinquencies among business borrowers and related stresses to some banks’ balance sheets.

OK, already happening. Chapter 11 bankruptcies spiked 63% in March from a year ago and have hit the highest level since April 2011. The credit cycle has already begun to turn.

So Brainard has just outlined in her elegant and soft-spoken Fed-speak manner a big part of the Everything Bubble and the risks its deflation poses to the banking system.

She then explains that the banks are in good shape now, very profitable, with plenty of liquidity, and with large capital buffers, and are much more tightly regulated than before the Financial Crisis, so that they can take a good wallop from their borrowers without collapsing. This leads her to her next topic, with stark references to the Financial Crisis: Now – the good times – is not the time to back off from regulation and it’s not the time to lower capital requirements and reduce liquidity rules.

But it is the time to tamp down on these “elevated” asset prices that are putting banks at risk.

There appears to be now a near-consensus at the Fed about this. The keyword is “gradual.” Nearly every time the Fed says anything big, it has “gradual” in it. And this is why the tightening will continue though it may become slightly less “gradual.” But because it’s still so gradual, it will go on for a long time – with the goal of deflating the Everything Bubble very “gradually.” That would be the ideal scenario. No economic upheaval, no sudden collapse in asset prices, but also no spike in inflation that would push the Fed to abandon the “gradual” approach and go for some kind of monetary shock. Just smooth gliding at ever lower altitudes for many years. That’s the best-case scenario after nearly a decade of rampant asset price inflation generated by experimental monetary policies.

The corporate bond market, particularly the junk-bond market, is happily dreaming in La-la-land till the rude awakening. Read…  Junk Bond Market Still in Total Denial, Fighting the Fed 
 

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  87 comments for “Now Even a Fed Dove Homes in on the “Everything Bubble”

  1. Sporkfed
    Apr 19, 2018 at 7:27 pm

    Is the FED surprised that investors drank from the punch bowl for so long ? It’s going to be one hell of a hangover.

    • Tom Kauser
      Apr 20, 2018 at 12:46 pm

      When the federal reserve was stealing your money to insure a smooth profitable bond spread it was all good autopilot and now its bush pilot tree top flyer? Splat……..!

  2. Apr 19, 2018 at 7:31 pm

    Our Minsky moment is coming.. Minsky warned that capitalism’s greatest vulnerability wasn’t when things were going south but when the times were good and investors would overshoot whatever investment was the hot thing and bring about another crash. What kind of a crash would an everything bubble look like? And a worldwide one..

    • DM
      Apr 19, 2018 at 7:38 pm

      Don’t understand when capitalism gets the blame for this. This is a manipulated market with ultra-low interest rates creating a bubble we have never seen before. Without Fed intervention, bubbles can and do occur but are much smaller and dealt with quickly.

      • Apr 19, 2018 at 7:55 pm

        The Fed was born in 1913 in an effort by Congress to give the nation a safer and more flexible monetary system because of all of the crashes in the 19th century which were honestly called depressions. I do agree though that this is a bubble, many many bubbles, like we have never seen before.

        • Sam Lowry
          Apr 19, 2018 at 8:45 pm

          Government-granted monopolies on bank-note issue didn’t begin with the Federal Reserve. The Federal Reserve was merely the granting of such a monopoly at the national level. Hence the Great Depression.

        • alex in san jose AKA digital Detroit
          Apr 19, 2018 at 10:06 pm

          Actually they were called “panics” and the term “Depression” was used for the 1929 one because it was felt that using the standard term “panic” would … panic the public too much.

          Then in the 1970s or, there was a short deep one in the early 80s, the word “recession” was used because no one wanted to use “the D word”.

        • Michael Fiorillo
          Apr 20, 2018 at 8:24 am

          Booms (and all the stupidity, delusion and scams that accompany them), busts and crises are endemic to capitalism; it’s a fundamental characteristic of the system, as a quick skimming of history demonstrates.

      • TropicalSunset
        Apr 19, 2018 at 8:46 pm

        “Without Fed intervention, bubbles can and do occur but are much smaller and dealt with quickly.”
        ——>Before the Fed in the 1700’s and 1800’s U.S. there were some major financial panics, crashes, runs on the bank, etc… and they were very frequent every few years. I’m not a fan of the Fed and rate manipulation and money printing, but you should do some reading on the cycles prior to the Fed. And many claim that the great depression which lasted 25 years, the severity of which was due monetary policy being too right.

        • Dan Romig
          Apr 19, 2018 at 10:07 pm

          Yes, an example of this monetary tightening occurred in 1833. This was three years before the twenty year charter on the Second Bank of the United States was to expire, which it did under President Jackson when Congress did not renew the charter.

          Jackson was an avowed opponent of the Rothschild dynasty which largely controlled both the First and Second banks of the U. S., and he had diverted government deposits to banks outside of the Second Bank. In response, the Second Bank began a contraction of the money supply. This caused a depression. Jackson responded, “You are a den of thieves’ vipers, and I intend to route you out, and by Eternal God, I will rout you out.”

          When the Fed was created, it too was given a twenty year charter, but Congress intervened in February 1927 by granting the Fed to have succession until dissolved by an Act of Congress or until forfeiture of franchise for violation of law.

        • Nick Kelly
          Apr 19, 2018 at 11:02 pm

          This mantra: ‘central banks are evil’ crops up all the time on the circuit.
          Since all developed countries have a central bank, this is kind of like saying ‘everyone is out of step but me’

          And of course as you point out, all historians of the Depression blame Fed INACTION not Fed action.

          These critics of central banks can’t conceive of them doing something positive. They are absolutely convinced the Fed should have stood aside as the US banks faced collapse in 2008.

          But they’ve never lived through a Depression, even though as they pound away on their computers, instead of riding the rods, or begging for a sandwich, they think they’re in one.

        • Kent
          Apr 20, 2018 at 5:32 am

          I’m not opposed to central banks either. However they do pose a moral hazard by bailing out banks. Which is why as an offset, banking activities should be fiercely regulated to insure they don’t go off the rails in the first place.

        • JZ
          Apr 20, 2018 at 2:08 pm

          Nick Kelly, CBs are cracks, hash, cocain, opioids. Do they only do harm? No, they give you calm, smooth you down and give you eccstasy. They also do harm to your body, make you weak and rot. Should we ban central banks? Different people take different view.

        • Otto Maddox
          Apr 20, 2018 at 4:28 pm

          Mr Romig didn’t include the best part of the story – Jackson on his deathbed stating that he had “killed the bank.” Of course, the bankers rewarded him by putting him on the twenty dollar bill.

      • Sue
        Apr 21, 2018 at 6:28 am

        Yep! Exactly. Its crony capitalism, not much different than oligarchy run Russia, really. In crony cap, the banks own the state, and in “communism,” the state owns the banks, and in both the elites go back and forth for jobs. Same end result: bankruptcy.

    • 2banana
      Apr 19, 2018 at 7:41 pm

      Can you really have capitalism after QE1, QE2, QE3, QE4, ZIRP, HARP, HAMP, TARP, Operation Twist, bailout after bailout, not one banker in jail, too big to fail, tearing up 200 years of contract law (GM bankruptcy), adding more to the debt than every other administration combined and accounting for inflation, etc.?

      • DV
        Apr 20, 2018 at 4:59 am

        Yep, and the government spending now accounting for some 60% of GDP. It is called state capitalism.

      • Tom Kauser
        Apr 20, 2018 at 1:06 pm

        Hank Paulson made recessions obsolete!

    • van_down_by_river
      Apr 19, 2018 at 10:56 pm

      stability begets instability.

      The central banks made lots of money available to plug holes in the leaky dam, unfortunately the entire structure is nearing catastrophic failure.

      The Fed should have been working on repairing the structure instead of plugging leaks. So lazy. So reckless.

    • Frederick
      Apr 19, 2018 at 11:56 pm

      The only trouble is things are only good for those in the top ten percentile Otherwise not so good Recoveries in the past benefited the middle class

      • alex in san jose AKA digital Detroit
        Apr 20, 2018 at 1:40 pm

        Exactly! For the 90%, the 2008 recession never ended.

    • Thomas R Kauser
      Apr 20, 2018 at 1:00 pm

      Derivatives where written when short rates would never go north or business synergies south! Corporate securities fraud would be my guess or attorney general’s investigation of fraud in real estate? Wall street journal could use a bone?

  3. Max Power
    Apr 19, 2018 at 7:40 pm

    It’s incredible how the often the financial media likes to remind us that companies are “flush” with cash right now. Rarely in those reports though do they also mention that corporate leverage is near all time highs.

    It’s as if I took out a big cash advance on my credit card, then go running down the street shouting “yippee! Look at me. I’m flush with cash!”

    • Apr 19, 2018 at 11:08 pm

      Max Power,

      It’s actually true that “companies” — a generic term — are flush with cash. But that’s only 1/4 of the story. Here is the other 3/4 that the media forgets to tell:

      1. Most of this record cash on corporate balance sheets is borrowed money. There is a massive pile of debt on the other side of the balance sheet. Hence, corporate debt is at a record, even as cash is at a record.

      2. Some companies — Apple, Microsoft, Google, etc. — do have a lot of cash and not all that much debt. These are a few huge companies that distort the overall stats – and they’re not going to get in trouble.

      3. Many companies have a too much debt and very little cash, and what little cash they have is borrowed money. These are the junk-rated companies. There has never been more junk-rated debt. The overall quality of debt has deteriorated sharply over the past few years. And these companies are the ones that are going to cause the next credit meltdown, not Apple and Microsoft.

      This is part of the problem when we report averages. The average creditor is not going to collapse. It’s the lower 20% that is vulnerable. During the Financial Crisis, about 10% of the mortgages went bad and caused the mortgage meltdown. So by looking at the averages, we’re looking at the wrong thing and miss the problem.

      • Gibbon1
        Apr 20, 2018 at 1:34 am

        Average and medians are utterly abused. Those techniques are fine when used to filter truly noisy data. But very often they’re used to obscure the true picture. Meaning your data has a distribution. That distribution is actually important.

        Like 1/4 of companies are ‘fine’ and 3/4’s will go under if interest rates rise or there is a demand slump.

        • Paulo
          Apr 20, 2018 at 10:20 am

          Or like yesterday’s article inferring that the majority of Canadians have record debts, when in fact it is probably limited to a couple of major cities. :-)

        • Gibbon1
          Apr 20, 2018 at 1:52 pm

          Another good one is a statistician in the 1950’s was tasked with determining the bio metrics of the average air force pilot. (in short badly designed cockpits were resulting in a lot of nominally pilot induced error and crashes). Being smart what he told them is there is no average pilot. Doesn’t exist.

          They had to redesign the cockpits so the seats and controls were adjustable.

      • Lee
        Apr 20, 2018 at 2:12 am

        If you companies with lots of cash on their books and not cash offset by debt, look at Japan.

        There are a lot of companies there flush with cash and they are usually not the big ones as in the USA.

      • Paul Morphy
        Apr 20, 2018 at 10:37 am

        I take all of those points, Wolf.

        When the financial system crisis/global financial crisis began in 2007, we were told that the fault was a liquidity problem. There was a liquidity problem for sure but there was also a (in)solvency problem.

        A person/company/country can be illiquid but solvent.
        A person/company/country cannot be liquid and insolvent.

      • Tom Kauser
        Apr 20, 2018 at 1:30 pm

        Come on pit get with the program! Real estate stopped going up PERIOD! Once originators stopped finding buyers mortgage supply backed up and the creators started forging what wasnt burned in a desperate attempt not to get stuck with a hot potato? Hank Paulson sucked the life out of lehman , dick fuld, the corporate bond market and congress while the Fed replaced a 750 billion dollar loan from the congress that got bushwacked by Hank Paulson with 23 trillon in loans mostly to Europe?

      • Apr 20, 2018 at 2:40 pm

        You might assume that if we have another financial crisis the Fed will use the same playbook, (it seems the market doesn’t believe in rate hikes), and when the Fed bails out markets they bail out companies with the most debt, junk companies. One of Hussmans charts shows that, the lowest decile in terms of price to revenue outperformed. We all know this, just will the Fed do it again?

        • Apr 20, 2018 at 4:19 pm

          If we get another financial crisis with credit freezing up, the Fed will do things that will pop my ears, like it did last time.

          But if we don’t get another financial crisis over the next few years — if we just get higher rates, more bankruptcies, gradually declining asset prices, etc. so the sort of end of credit-cycle clean-up this place really needs — the Fed will continue to “normalize.”

          If the economy goes into a recession with surging unemployment, the Fed might drop rates some in the classic manner. But it will keep rates above zero. And it won’t restart QE. It wants to get back to “normal,” including dealing with recessions.

          That’s what my tea leaves say.

      • Richard Graham
        Apr 21, 2018 at 12:29 pm

        Here in Canada, KKR burdened the National Post group of companies to finance the acquisition, and pump profit out of the company disguised as loan payments. Ad and subscription revenues collapsed and now they are begging the Feds for support.
        After quacking about the nobility of free enterprise and the utility of the market, KKR now expects Canadians to shout ‘Mommy’s Coming’ and subsidize their greedy stupidity.
        The same effort is being made on behalf of Kinder Morgan.

  4. DK
    Apr 19, 2018 at 7:44 pm

    What’s that famous lone from Hemingway about going broke….gradually, and then suddenly.

  5. govinda
    Apr 19, 2018 at 7:50 pm

    Funny how the concern only shows up after the Dems get knocked out of power. Its almost as if the fed was under their thumb and forced to hyperinflate. But thats crazy talk – almost as crazy as the notion that the FBI or DOJ (or CIA, IRS, EPA, etc.) was under political pressure to look the other way for some people and frame others with fake claims. But thats crazy talk!

    • Apr 19, 2018 at 8:00 pm

      Just about as crazy as the Republicans being the responsibly fiscal party cutting taxes and raising spending at the same time.. and expecting a balanced budget.. Actually a surplus that will retire our national debt.

      • Paulo
        Apr 19, 2018 at 9:54 pm

        I haven’t heard lately any talking heads mentioning the often ballyhooed 4% growth forecasts; growth so robust it will solve any cash….ooops TAX flow problems resulting from the US tax cuts and spending bill. Not even from Steven Moore.

        A world of hurt for those carrying debt will soon be upon us.

        No worries mate, tariffs will fix up any shortfalls right quick.

      • mark
        Apr 20, 2018 at 5:50 am

        Right – The spectacular difference between the multi-millionaire Demopublicans and the Republicrats . And the great level of concern they have for the rest of us.

        We have one party in America – the War Party Of The Rich.

        • Michael Fiorillo
          Apr 20, 2018 at 8:36 am

          Yes, we have a War Party of the Rich, but it has two wings, a center-right Democratic one, and a far-right, often deranged, Republican one.

          The Democrats are perfectly happy to wage wars based on lies, foreclose on your house, ignore brazen white-collar criminality, militarize law enforcement, deny your medical coverage, violate your constitutional rights, etc. just as long as the people doing it represent a racially, sexually, and ethnically diverse cross section of the population.

          The Republicans want the same things, but remain obsessed with having them continue to be controlled by the racial legacy 10%.

          You’re welcome to Lean In, Be Mindful, Seek Wellness and Celebrate Diversity, but if you demand a dollar-an-hour wage increase, the fangs, claws and Robocops will immediately appear.

        • RG
          Apr 20, 2018 at 9:20 am

          I call it the Uni-Party. Just two cliches within it (Dems and Repubs) competing for the spoils.

          Living in the DC area you find out quickly that most of them (except the true extreme crazies/devotees) are all good friends. They go to each other’s parties, etc. But when the cameras are on they put on their act. Sort of like Professional Wrestling.

        • Michael Fiorillo
          Apr 20, 2018 at 3:24 pm

          Yes, professional wrestling has been a good metaphor for while now, and just in case anyone might question that, we even have a world-class Heel and WWF performer in the White House.

          The show must go on!

    • TropicalSunset
      Apr 19, 2018 at 8:52 pm

      “Funny how the concern only shows up after the Dems get knocked out of power”
      —–> I agree…many people think the Fed should have started raising rates much earlier and faster (during the Obama admin) and not done subsequent QE’s. But now that a Repub is in the white house, all of a sudden the Fed seems to have found religion over deflating their bubbles with fast rate hikes and reducing the balance sheet.

      • Art
        Apr 20, 2018 at 7:29 pm

        Except for a Democratic president, the Dems have been out of power since Jan. 2015 with Republican majorities in both the House and the Senate!!! And before that, the democrats only controlled the House for the first two years of the Obama administration. In fact, except for those two years, Republicans have controlled the House since 1995! And except for 8 yrs–2 at the end of GW Bush and 6 during the Obama presidency–Republicans have had a majority in the Senate as well.
        And by the way, Trump had frequently been critical of both QE and ZIRP, and Republicans generally have been more aggressive than democrats in pushing for “normalization” of the Fed’s balance sheet. Now we have Powell, A TRUMP APPOINTEE as Fed chair, and he seems, so far, to be willing to proceed with gradual interest rate hikes and balance sheet roll off according to the plan mapped out under Yellen’s Fed. A plan that was mapped out during Republican control of the House, the Senate and the WH. So please explain to me how proceeding with rate hikes and rolloff is the fault of the Democrats.

    • Lee
      Apr 20, 2018 at 2:15 am

      The powers that be need a fall guy and Trump will be it no matter what. If they can’t get him by some ridiculous bs charges of collusion or obstruction, they’ll tar him for history as the one that brought the entire house down enven though he had nothing to do with QE or the subsequent unwinding.

      • Uncle Bob
        Apr 20, 2018 at 7:28 am

        What are you guys talking about? Trump is the one who picked the current Fed chairman…

        • Apr 20, 2018 at 8:19 am

          Our economic system — as is typical in any large or complicated system — has huge inertia.

          Changes that are bound to occur (as a result of ‘input’ adjustments) , will usually happen with a multi-year lag.

          I have always believed that Presidents (and the like) should zip their lip about “economy being SO GOOD on my watch” , just because of the system inertia.

          It is my profound belief that all changes in leadership or policy, have effects that occur with a 4 to 8 year lag. This make sense.

          So Clinton policy changes were ‘enjoyed’ during the Bush 43 reign — Bush 43 policy changes were ‘enjoyed’ during the Obama reign — and Obama policy changes are now being ‘enjoyed’ during the Trump reign . . . . .

          It is very likely that changing the composition of the FED will not have much measurable effect on the economy for the first four years of Trumps’s Presidency.

          The economy is akin to a YUGE SHIP, with ENORMOUS MASS, that responds to changes made at the helm very very slowly.

          There are no buttons to push to make USA or World economy heel.

    • timbers
      Apr 20, 2018 at 2:54 am

      I once googled “CIA controls media.” I’ve never seen so many articles on the subject. If I tell people the CIA and our Govt & “deep state” control our corporate owned media which is mostly fake news and obediently amplifies factless deep state narratives, I’m told I’m a conspiracy theorist. But proof of it happens often (WMD in Iraq, Russia hacked US election, Syria used chemical weapons, Russia poisoned U.K. spies…etc etc). The best antidote I can think of is to rely on some alternative sources – like Wolf Street and others – and always allow that I could be mistaken, and always insist and proof and empirical evidence on topics that appear to designed to engender war, conflict, and higher military tensions and spending.

      • Paulo
        Apr 20, 2018 at 10:31 am

        For me it was the Gulf of Tonkin Resolution. Of course I was only 9 years old at the time but my veteran parents were already working towards emigrating. Iraq WMDs only made me remember their evening discussions. (and tears).

        And a whole lot of money was made along the way by the usual suspects; Mc-Douglas, Boeing, etc. Shareholders. Banks.

        My wife and I are hunkering down, trying to enjoy each day, and making up our own minds. Thank you WolfStreet and commentors for your help!

      • Apr 20, 2018 at 2:31 pm

        Goes back to Lookout Mountain, and the Laurel Canyon conspiracy, and probably before that.

  6. no_free_lunch
    Apr 19, 2018 at 7:57 pm

    Fed policies have yet again, set up the U.S. economy for a significant mean reversion event. The is baked into the cake. No way to stop it. Humpty Dumpty. A potential silver lining is that many will finally understand that the Fed is the root cause and not the solution. Only time will tell. In the mean time, this is going to hurt. References here:

    1) https://www.dallasfed.org/news/speeches/fisher/2010/fs101108.cfm
    Federal Reserve Banks of Dallas
    Speech by Richard W. Fisher, President and CEO (2005–2015)

    “One cost is the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises.”

    “The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.”

    “This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice.”

    2) “Permit me to issue and control the money of a nation, and I care not who makes its laws.” – Mayer Amschel Rothschild, International Banker

    3) “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    4) http://www.stockhouse.com/news/newswire/2018/04/17/early-fall-out-from-toronto-s-burst-housing-bubble

    “Extended low interest rates always cause housing/real estate bubbles, and every central banker knows this.”

    “These housing bubbles were deliberately manufactured by Western central banks.”

    “No other government in the history of any Western nation has engaged in such monetary recklessness, even briefly.”

    5) https://www.home.saxo/-/media/documents/quarterly-outlook/quarterly-outlook-q2-2018.pdf

    “We are nearing the end of the biggest monetary experiment in history, when central banks replaced politicians as decision-makers . Their maintaining of low- and negative interest rate policies and quantitative easing for far longer than the normal business cycle would dictate was necessary kept markets in a good mood, but with the unfortunate side effect of killing the market-based economy .”

    “The benefits from the globalised system and particularly from the central bank’s asset-pumping response accrued near-entirely to the already wealthy, while the average economic participant lost out .”

    • Nick Kelly
      Apr 19, 2018 at 11:27 pm

      The Fed has said: we are at the limits of monetary policy to correct imbalances in fiscal policy.

      They bought time, mortgaging the future, to let politicians realize ‘you can’t always get what ya want’

      So what happens: a 1.5 TRILLION dollar tax cut, for an economy 22 trillion in the hole, so some dimwit can get reelected.

      Not the Fed’s fault and nothing it can do about it except raise rates to normal and wait for demagogs to blame the Fed when we experience re-entry.

      • James Levy
        Apr 20, 2018 at 7:13 am

        What’s hard to convey is how establishmentarian the Fed is and how its narrow goal is almost always to defend the status quo. The fiendish machinations that so many see are actually usually stop-gap measures to prop up the wealth of the investor class, as the dogma is that if you keep the investor class happy and stuffed with cash all good things will naturally flow from that condition. Other than that, the health of the financial sector (especially its titans) is always on the agenda. The Fed cares about little else, although it may from time to time notice the plight of the impoverished, sigh, and say it wished it could do something about that but it’s just out of their hands.

  7. andy
    Apr 19, 2018 at 9:12 pm

    Well, whenever I mention the bubble I get laughed at, everywhere. Everything is fine, people tripled their money and spending. Thanks to Ben’s courage to act.

    • Apr 19, 2018 at 11:11 pm

      Yes, bubbles are really strange that way. At their peak, many people take them for granted and assume that these conditions are the new normal and will go on into perpetuity.

      • Gershon
        Apr 19, 2018 at 11:28 pm

        Come now, Wolf, you naysaying so-and-so. It’s different this time. Every permabull analyst on CNBC (no other kind is allowed) has said Everything is Awesome – buy stawks!

  8. mick
    Apr 19, 2018 at 9:40 pm

    When the bubble is bursting, these people suddenly start discussing “Risk mitigation,” which is their device for popping the bubble while pretending to be trying to protect the financial system.
    You see, if your goal is to create bubbles and pop them for the robbing of the masses, you can’t come out and say that now can you?
    No, you need a cover, and that cover is usually playing dumb, as if they don’t know a bubble when they see one, despite having financial data that would blow your mind, provided by the big banks and the FED itself, yet people believe these folks don’t know any more than the average guy on the street.

    Yes, the perfect cover, thanks to a gullible and naive public.

  9. panamabob
    Apr 19, 2018 at 9:50 pm

    This will not end well, it’s cooked in an illusion. All the free lunches will cease at some point and there will be a pay back, unfortunately many wrong people will pay the price. Some will be reaching for yield, others out of greed, and many out of ignorance due to their due diligence or paid advisors.
    Just like the last times in history.

  10. bev kennedy
    Apr 19, 2018 at 11:15 pm

    Very interesting read including the comment section and historical references

    • Apr 20, 2018 at 8:37 am

      I second that heartily! Not just interesting, as you say, but the caliber of the Commentariat here is nothing short of astounding — especially when measured against other popular sites — with an active comment section.

  11. Gershon
    Apr 19, 2018 at 11:25 pm

    The time is near at hand when the Fed’s Goldman Sachs handlers are going to take out massive short positions, then order their creatures at the Fed to hike rates sharply enough to implode the massive asset bubbles created by nine years of the Fed’s “accommodative” monetary malpractice. But first a few Fed mouthpieces will be directed to issue tepid warnings that everything is in a bubble, as if belatedly receiving some revealed truth, to gauge the reaction of the muppets.

  12. raxadian
    Apr 20, 2018 at 12:20 am

    While FED raising rates will take care of getting rid of cheap debt, what it will take for Leveraged Buy Outs to made made illegal? Another economic crisis doesn’t seem like it will be enough….

  13. Gershon
    Apr 20, 2018 at 12:30 am

    The Federal Reserve – stealthily robbing you of your purchasing power since 1913.

    • James Levy
      Apr 20, 2018 at 7:19 am

      Hold it right there: robbing who? Do you really want to do an historical analysis of the purchasing power of most Americans in 1913 compared to today? Are you really arguing that we were all so much better off in 1913 than we are today? You want to tour the major industrial cities of the North or the sharecropper shacks of the South in 1913 and say that the Fed has robbed those people of their purchasing power? Or even that our plutocrats today are so much poorer than they were in 1913? A good case can be made against the Fed. It isn’t helped by unsustainable assertions.

      • Paulo
        Apr 20, 2018 at 10:45 am

        When I first started working as a carpenter’s apprentice in 1973 I could buy 2 cases of beer for an hours work (gross pay), or 8 loaves of bread, or two tankfuls of gas for our VW……

        Now, the same starting wage buys 4 loaves of bread, a 3/4 case of beer, or 1/3 tank of gas for a VW.

        Climbing Debt is an attempt to replace once cheap energy and people are using personal debt to maintain an unsustainable lifestyle. Unfortunately, the promises of always bigger and better seem to have been believed and accepted as a right of citizenship. Like the above moniker, ‘no_free_lunch says, there really is no free lunch today (or tomorrow).

        • James Levy
          Apr 20, 2018 at 12:09 pm

          I totally agree about the cheap energy angle, but your choices are selective. How much was a long distance call back then? A computer? A large console color TV? An airplane ticket to Europe? We can all pick things that were cheaper back then, and other things that are comparatively cheaper now. My point was that the idea that purchasing power has been being “stolen” since 1913 just doesn’t bare up under any serious historical scrutiny. But again, when it comes to the absolute cost of energy extraction versus usable energy, we are much worse off than we were in the early 1970s, and the decay in energy returned on energy invested is alarming.

      • Frederick
        Apr 20, 2018 at 12:03 pm

        James Levy NO you hold it right there At least those sharecropper shacks weren’t encumbered by debt and excessive taxation I wonder if people are truly better off today I think not The FED is a group of criminal banker parasites living off the backs of hard working Americans and your lame attempt to legitimize them is pathetic

        • Michael Fiorillo
          Apr 20, 2018 at 4:03 pm

          Right, they weren’t encumbered by debt to the government, they were far more heavily encumbered by debt to the landowners they rented from.

          Do you even know how sharecropping worked?

          Sharecroppers and many tenant farmers in the South were literal debt slaves, and and the Black ones (and often the White ones, as well) were denied the vote by the same Planter class they were indebted to, via literacy tests, poll taxes and straight-out violence. It was only your boogieman government that forced, through the courts and sometimes the military, changes to that brutal system.

          Oy, it’s a chronic and universal affliction suffered by all Glibertarians: blindness, often willful, to the common sense fact that power and authority/”government” will always be with us, and that it’s really a question of who controls it: an engaged populace, a venal political and professional class serving money and monopoly powers, dictators, or even warlords…

  14. Cynic
    Apr 20, 2018 at 7:55 am

    The devaluation of currency is inevitable.

    No need, therefore, to look for crooks and robbers.

    Life itself is, proverbially, a bubble: when it pops, all the money you will need is the two coins on your eyelids to pay Charon the Ferryman.

    • govinda
      Apr 20, 2018 at 2:57 pm

      I dont know who this Charon person is, but I suspect even his prices may be going up as well.

      But yes, life itself it a bubble – a matrix like construct of people’s perceived fantasies and realities woven together. Our debt – every country/state/personal debt load – is a somewhat tangible accounting of the human struggle to maintain the illusion of their fantasies rather than accept an undesirable or even grim reality.

      And no, I dont celebrate 4/20!

  15. Setarcos
    Apr 20, 2018 at 8:03 am

    The Fed’s primary tool = legalized price fixing scheme that stands on top of the US and the economy. Primary goals = maximum employment and price stability, 2 things which are actually conflicting.

    The FED monetary policy = a giant attempting to balance a large & leaky waterbed with nipples filled with nectar on its shoulders while walking along with it in a hurricane with all the little people also walking along under it …in chains. The big people walk along beside it, suckling.

    • Apr 20, 2018 at 8:40 am

      I envisioned the image you painted — while I was reading.

      Easily seen, and very informative as to your basic premise. All of it !

  16. Drango
    Apr 20, 2018 at 8:11 am

    The biggest bubble in existence is the derivatives bubble, but you can’t blame low rates for that. Banks love derivatives trading because it allows the creation of profits without having to deal with pesky issues like lending and due diligence or even the real economy. But central banks, by forfeiting their responsibility to monitor banks, can certainly be blamed when the derivatives bubble pops. Brainard saying that the banks are tightly regulated is laughable. There are currently about $1.2 Quadrillion worth of derivatives outstanding. That’s Quadrillion with a Q, not a T. Needless to say, none of these derivatives are backed by anything of real value, except the willingness of banks to treat the derivatives themselves as valuable. Will the central banks let these derivatives die? Or will they destroy the world economy by committing every resource to save the trading arms of the banks instead? We’ll find out soon enough.

  17. Petunia
    Apr 20, 2018 at 10:09 am

    Wolf,

    Your Fed dove is not the only Fed on tour. The outgoing NY Fed President, Dudley, just made a speech at my alma mater, in the Bronx. A NY Fed President going all the way to the Bronx is a monumental event. I am wavering between pride and genuine fear.

    https://www.marketwatch.com/story/dudley-has-an-idea-for-when-he-leaves-the-fed-a-broader-inflation-target-2018-04-18

    On another scary note, I just heard the spread between 10yr and 30yr money is 10-20 basis points. Since mortgage lenders fund at the 10yr rate and lend at the 30yr rate, the profit margin for them is disappearing fast. If they can’t make money, they will exit the housing market, or push adjustable rate mortgages. Anyway you look at it, housing will not be getting more accessible.

    * Full disclosure: I usually don’t capital the the term Fed, but I did this time, in order not to embarrass the institution which I proudly attended.

    • Petunia
      Apr 20, 2018 at 10:15 am

      I meant “capitalize”, sorry!

      • Apr 20, 2018 at 10:32 am

        I kinda liked “capital” better. It had a certain flair to it in this context :-]

        • Petunia
          Apr 20, 2018 at 10:40 am

          Probably a true Freudian slip.

    • Paulo
      Apr 20, 2018 at 10:50 am

      Maybe the days of the 30 year fixed mortgage are past their prime. :-)

      We have 5 years in Canada, and once upon a time in this far off northern land people used to plan for a raising rate when they first locked in their best guess and purchase.

      • Seen it all before, Bob
        Apr 20, 2018 at 11:32 am

        30 year fixed mortgages have been a legacy in the US. They haven’t been risky to banks while rates have been falling but now that rates are rising, what bank/lender wants to hold a 3.5% 30 year loan? The onslaught of lenders calling me to refi with cash out as an incentive at a 4.25% rate has been overwhelming.

        FYI, I am staying put at 3.75% 30 year loan unless rates drop below this. I expect my FDIC insured savings account will be paying 5+% in a couple of years and I will continue to have no motivation to refi. I can make money off the banks at that point. My parents did this with a 6% mortgage in the 80’s under Carter/Reagan. They were making 10% in a safe CD under Reagan. Refi’s were not commonly pushed back then but why would they ever pull cash out to pay off their mortgage?

        • Seen it all before, Bob
          Apr 20, 2018 at 11:47 am

          In my cynical opinion, wages have been flat during the last 10 years. Housing has been increasing an at least 9% per year. People’s houses look like a gigantic piggy bank. If you need money, borrow from your house at 4.25% with a cash out refi. It relieves the banks and lenders from holding your prior 3.5% loan.

          Actually 4.25% is still a great deal for the people who need to pay off 7% student loan debt or 28% credit card debt.
          However, if that 28% credit card debt keeps appearing and wages remain flat, the people are in trouble.

        • Seen it all before, Bob
          Apr 20, 2018 at 11:57 am

          BTW, my 3.75% loan was recently sold off to Mr Cooper from CitiBank. CitiBank is bailing out of these “loser” loans.

          Mr Cooper sends me 4 E-mails per day on how nice my life would be with more cash on a refi at a 4.25% loan.
          Mr Cooper sounds like a nice guy, but….. no.

  18. Tim
    Apr 20, 2018 at 11:26 am

    Hello, Wolf:

    question: how does the accounting change instituted in ’09 affect this everything bubble forward dynamic? The mark to model accounting alters things versus the mark to market model. The la-la land valuations have an inherent support in the mark to fantasy magic kingdom.

    The -bad deals made in good times- have to have valuation adjustments in order for the medicine to take effect, or don’t they? Can the sky high valuation come down even if there is a credit freeze?

    “It’s worth what we say it is, not what we can sell it for. Bidless – shmidless.”

  19. Apr 20, 2018 at 2:34 pm

    Brainard would have been Fed chief if the United States was a democracy. She is also not much of a DOVE.

  20. c smith
    Apr 20, 2018 at 3:27 pm

    “Financial imbalances” Really? A Fed governor has the gall to talk about imbalances, when her institution is directly responsible for the greatest “imbalance” in the history of modern finance? Get your thumb the hell off the scale, lady!

  21. EcuadorExpat
    Apr 21, 2018 at 1:16 pm

    It’s a dollar bubble, plain and simple. The American public understands what a bubble is, but nobody will publicly call it, so the public remains confused and gullible. I guess it’s more fun (and profitable) to pontificate about all the details, but 10 years after the dollar bubble deflates, history will call it that.

    And we all know what happens when a bubble deflates. It’s just that the magnitude of this one defies the imagination. Like Nostradamus, who could not see the world without the Catholic Church and called it the end of the world, those who are not prepared for the dollar to deflate to insignificance, will call it the end of the world too.

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