The Fed Is Concerned About Small Cap Forward Multiples And Covenant Lite Loans?

Tyler Durden's picture

While everyone is focused on any additional clues about the taper and the pace of Fed Flow reduction, perhaps this is the key standout section in today's Minutes, one that focuses directly on the risk bubble the Fed's policies have blown.

Participants also reviewed indicators of financial vulnerabilities that could pose risks to financial stability and the broader economy. These indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis. In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans. A couple of participants offered views on the role of financial stability in monetary policy decision-making more broadly. One proposed that the Committee analyze more explicitly the potential consequences of specific risks to the financial system for its dual-mandate objectives and take account of the possible effects of monetary policy on such risks in its assessment of appropriate policy. Another suggested that the importance of financial stability considerations in the Committee’s deliberations would likely increase over time as progress is made toward the Committee’s objectives, and that such considerations should be incorporated into forward guidance for the federal funds rate and asset purchases.

In other words, the Fed realizes the "importance" of its role in preserving financial stability in the future, specifically one the bubble bursts? Don't worry though, yesterday none other than SF Fed president John Williams said stocks are undervalued.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cult_of_Reason's picture

Irrational Exuberance 2.0 in 2014

NotApplicable's picture

Wait... a rise in margin credit... is a bad thing?

But debt is money!!!!

Cult_of_Reason's picture

"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?" asked Greenspan in 1996.

insanelysane's picture

Stocks are undervalued.  There is a possibility that every company could produce a product or service some time in the future that every person on the planet needs and thusly purchases.  Every stock is a steal unil it is valued somewhere near infinity - $0.02.

Cult_of_Reason's picture

US stocks are "fairly valued," and this "fairness" is determined by Commissar Bernanke, his Politburo (aka Fed) committee, and by Wall Street banksters.

Its Only Rock N Roll's picture

Well, on the upside at least they are talking about the bubble bursting before it burst this time around. 

Completely useless they are. 

Tenshin Headache's picture

I'm just pleased that they finally figured out how to spot a bubble. Took long enough, for a room full of PhDs.

Spigot's picture

WTF! It sounds like that room full of PhDs is reviewing their own portfolios, not Central Bank policy decisions! Good God!

venturen's picture

But what about getting cash to the banks for the token fines they pay for the kabooki theater of punishment.....I mean how does one survive on a $500k bonus?

max2205's picture

Rinse and repeat

larz's picture

I am just glad these jeenyusses are on top of it TH and IORR

Jason T's picture

they should be concered about all this deadwood of bad loans building up in the economic forest..

asteroids's picture

When things blow up (again) will the FED "man up" and take responsibility?, Nah.

ArkansasAngie's picture

Maybe Mr. H at the WSJ will take the hit for them.


RaceToTheBottom's picture

Must be preparing the public for another large corporate bailout

TideFighter's picture

If you like your sock puppet  you can keep your sock puppet.


realWhiteNight123129's picture

It is bizarre, after 30 years of abandoning the principle of restraining excessive destabilizing bad credit formation there are having an epiphany?

I mean, are they next going to realize that they got it completely wrong in mixing up currency created against junk credit with moeny (the bullshit of monetary aggregates)?

Are they going to scrap hedonics adjustments?

Are they going to tell teh US Gov like the BoE told the British Gov in 1821: Repay you debt now we are not discounting your exchequer bills?

Are they going to recognized that let BLS cheat on inflation?

Are they going admit that since 1982 they did set rates too low which promoted a huge debt expansion?

Are they going to recognize that Strong´s "coup de whiskey" to the market was nothing in comparison to Greenspan?

I mean they must be scared, some of them might be trying to save their heads for when the monster they have created finally self-destructs.

That is the only interpretation possible. I think Fisher knows and is scared the shit and is trying to protect his head. When the stuff implodes, leniency should be applied to him, I think he was sincere in his criticism. No leniency for Greenspan, Bernanke, Yellen should go to an asylum for seniles (she is a woman, so less harsh treatment) when the thing resets.

For Bush, Clinton, Obama, no leniency, and special harsh punishment for Summers, Rubin, Snow, etc....



rocker's picture

As much as I liked the guy as a actor, don't forget Reagan. 

Spungo's picture

Have you seen the price of Twitter stock? I can't believe it's this cheap considering how many people tweet every day!