Even Mainstream Academia Worried about Massive Bubbles in Markets

EconMatters's picture

By EconMatters  



Academia Finally Sounding Alarm


As stocks set new records each month even other academic economists are starting to realize that not only is the Federal Reserve behind the curve, but that they are part of the rising risk concerns that are building in the financial system, and their failure to take responsibility for valuations that are 10% over-valued even on the most optimistic valuations, is alarming given the past bubbles and the damage that has occurred through excessively low interest rates providing far too much liquidity in the system. 


Far Too Much Liquidity in the Financial System 





Make no mistake with QE still going on, and a 25 basis points fed funds rate, combined with Japan, China, England and the ECB all providing loads of liquidity to the financial system, risk taking is off the charts, valuations are bubbly in many markets, and the entire financial system is setting itself up for another massive, deleveraging crash once again. 




There is just too much liquidity in the financial system, and the US and England are the two economies best able to start reducing overall liquidity on a global basis, the UK with a hot real estate market, and the US with a hot job market and overheated stock market. 


The point is that there is too much systemic risk right now and it is heading in the wrong direction given the fact that Britain and the United States are both performing far too well to continue to have recession era loose monetary policies. It might make sense in Japan and Europe but when you have even well performing economies with ‘recession era level’ of interest rates providing massive amounts of cheap liquidity to the financial system, no wonder we have so many bubbles in bonds and stocks.

Don`t Be Fooled by the Lag Effect



The financial markets are not acting and trading normally, trust me I have seen many market cycles, and there is more liquidity in the financial system than there was in the credit bubble of 2006, this means things are out of hand once again, and the Fed needs to start soaking up this liquidity, and talking much more hawkish, just to ensure two-way markets, as right now there are far too many one-sided, all-in markets with ‘zero perceived risk’, and therein lies the risk problem.



Prudential Regulation is Passing the Buck


The notion floated by Janet Yellen that “Prudential Regulation” will monitor and watch for risky capital allocation strategies is flat out false. As a market participant, I can tell her “Prudential Regulation” as a tool sure isn`t working right now, and there are massive bubbles in many asset classes, the markets don`t even trade correctly and there is far too much liquidity in the financial system. 


Moreover, if Janet Yellen truly believes that “Prudential Regulation” will be the answer in avoiding financial markets becoming ‘too risky’ or dangerous from a risk-taking standpoint, i.e., posing systemic risk to the entire highly correlated financial system; if she really believes this is an effective tool, then she needs to step down immediately because she is obviously not qualified for the position of Fed Chairperson! It is dangerously close to an alarming point right here, the bubbles keep building and the Fed needs to take responsibility for creating this systemic risk in financial markets.



The Federal Reserve are the only ones that can reduce the risk of another financial crisis by reigning in some of the massive liquidity that is bursting at the seams in all kinds of places with no real place to go. I don`t think they realize just how much liquidity is currently coursing through the veins of the financial markets, it is unprecedented. 


The fact that QE was allowed to go on for basically 2 straight years, and the cumulative effects of zero percent interest rates for 7 years has finally come into financial markets with a bang. There was a lag effect, and now the liquidity overflow is out of control, we are starting to build bubbles in asset classes that have no way of long term sustainability. Some markets are as much as 25% overvalued on a five year time frame. There is no way in hell that these positions are going to be solid investments five years from now!


When Economists Recognize there is a Liquidity Bubble, We Have a Serious Problem!


Martin Feldstein, Harvard University professor alludes to what many in the financial community recognize that risk-taking is out of control, financial markets are not two-sided markets anymore, there are massive mispricing`s in many markets, all spawned by too much liquidity in the system.

The Fed needs to wake up to the risk in the system that they have created, they have become complacent because of the lag effect, well there is no more lag effect, liquidity is sloshing around the financial system right now at record levels. 



The S&P 500`s latest record 2000 run, and Bond Yields at Recession Era levels because there is so much liquidity with no place to go even in sleepy August ought to wake the doves out of their slumber fogginess.  “Prudential Regulation” is not going to soak up the bubbly liquidity in the system, only Fed policy is going to reduce the current risk in the system. Stop passing the buck, and sinking your heads in the sand like ostriches, take some responsibility, and get your act together; we have a massive overflowing liquidity problem here in financial markets!


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Salsipuedes's picture

Mainstream Academia is nothing more than popsicle-stick scaffolding holding up the House of Marked Cards.

bardot63's picture

How many fucking commercials do I have to sit thru to see the fucking clip?

lasvegaspersona's picture

I have read that gold can act like a giant sponge and soak up liquidity keeping savers safe and allowing the currency to move along to others and fulfill it's function as a medium of exchange.

Saving currency and currency equivalents seems to be at the root of many problems.

It is just something to consider.

First gold must be allowed to trade in a physical only market however so that it can find it's correct value.

bardot63's picture

That's coming next month in Shanghai. The US and Comex don't like having a physical only bourse, but Shanghai is a game changer.

marathonman's picture

"Martin Feldstein, Harvard University professor".  Double whammy for credibility...

moneybots's picture

"The Fed needs to wake up to the risk in the system that they have created"


The FED has been awake to it all along.  They will just cast blame on something else when the time comes. 

lester1's picture

All bubbles eventually pop.

moneybots's picture

" Some markets are as much as 25% overvalued on a five year time frame."


Subtract the massive financial fraud and it more like 100% over valued.

TheABaum's picture

So there's a bubble, no kidding. Tell me when it's going to pop so I know when to load up on puts.

Robert_manboobs_ Paulsen's picture

I love when they say the recession ended.  Only if you are looking at the stock market in a vacuum and believe their goofy/faulty inflation numbers.  If we go back to 1980's inflation calculations then we have had negative real GDP growth for the last 6 years which dum dum dum equals depression.

just-my-opinion's picture

Not only that....But US has a "HOT" jobs market

Is Anybody Out There?

messymerry's picture

When the S&P closes above 2050 for 7 days straight, get ready to take flight. 

Emergency Ward's picture

I'm waiting for Nasdaq 5,000 for 10 days.  Hah!

Wild Theories's picture

If academics are saying it, does it mean we should bail now?

or are we still good till September? or 2015? or...

londoncalling's picture

annual R1 on nasdaq is around this sort of level, 4554 ish from memory

not sure we'll get too much further without pulling back


update: just did the math and annual R1 is around 4544 gapped over it yday, anyone buying here will regret it soon

Spungo's picture

lol hot job market. I guess those millions of people working part time all choose to work part time. The economy is so red hot that people don't even need 40 hours to get by.

JRobby's picture

Wow! like the early 70's all over again........................

shepsdad's picture

"Britain and the United States are both performing far too well "

"US with a hot job market"  

Only an academic, with no sense of reality, can make statements like these.

That being said I do not disagree with removing QE and beginning to let the market accurately "price" interest rates.

But this should have been allowed to happen years ago.

The correction will be UGLY.

Pee Wee's picture

Screw these so-called academics.  Where was their outrage with TARP, ZIRP and the systematic looting of the savers and risk averse?  And now that housing racketeering has completely priced out the aforementioned and food DOUBLED this year these ass clowns in gowns want to speak?  Give me a break, they are all shills, academic or otherwise.

Oh, this just in, academics say the markets ain't functioning anywhere, from labor to the price of paper clips... and no one saw a thing!

Let flaccid academics trying to save their own asses retroactively be the last out.

zeronero's picture

Price of Oreos

[2004] 2.99/lb
[2008] 4.29/18 oz
[2012] 4.59/15.5 oz
[2013] 4.59/14.3 oz
[2014] 4.49/14.3 oz

Food prices DOUBLED this year, right idiot???

Comte d'herblay's picture

While I would defend your choice of one of the main food groups, Oreos, (What do you call:  Tiger Woods, Kate Upton, Dennis Haysbert?) as a bellweather for an opinion about food prices, it is a bit anecdotal, doncha think?

I can attest to any number of foods, interest rates paid, banking fees, OTC drugs, insurance premiums, plastic ware, common household items like brooms, Swiffers, sponges, tampons, Deer corn, Buck Lure, ammunition, handguns, assault rifles, and my Surface to air missile launcher have exploded, so to speak, in price.

Value of an Oreo has declined significantly in ten years. The 'creme' once so wondrous, now some synthetic concoction that didn't even exist outside a petroleum R & D experiment that went bad, but who's looking? 

Not everything though has doubled, within  one year, for sure.

RaceToTheBottom's picture

Bring out the SHAMWOW.....  Cause nothing else will soak all that Liquidity up....

JRobby's picture

But wait! There's more if you call within the next 15 minutes.....................

messymerry's picture

..............aaaand we'll double your order, just pay extra shipping and handling. 



DavidC's picture

"...by reigning in some of the massive liquidity..."

For fuck's sake (I'm sorry but this is bloody annoying) it's REINING in , NOT reigning in!

Reign = to rule
Rein = to direct and control (as in reins on a horse).


KnuckleDragger-X's picture

While your asolutely right about rein-reign, I'm more interesting on what their definition of 'some' is.

LawsofPhysics's picture

You would think that "academics" would know how to use proper English.  Just speaks to the real "quality" of education these days.

messymerry's picture

I work part time at a local liberal arts university.  IMHO:  The faculty has the manners of baboons and the adminsitration is running an effing caste system.  Academia is deep in the pit of heniousness. 

Comte d'herblay's picture

This is an annoucement from the Spell Checker QualityControl department.

It is not the author's fault that our spell check universe did not look at the context in which the word reign was employed.  

Mea, fuckin' culpa.