Fed Warns: "Asset Valuation Pressures Have Increased", "Leverage Remains Elevated"

Tyler Durden's picture

It is a long-running Fed tradition to quietly incorporate material warnings (deep within) about asset prices in the semi-annual Monetary Policy Report submitted as part of the Chair's congressional testimony, and it did not disappoint this time either, when it made the following warning: "Nonfinancial corporate business leverage has remained elevated by historical standards even though outstanding riskier corporate debt declined slightly last year. In addition, valuation pressures in some asset classes increased, particularly late last year."

And elaborated:

Nonfinancial corporate business leverage has remained elevated by historical standards, and household borrowing has increased modestly, leaving the household debt-to-income ratio about unchanged. On balance, the ratio of aggregate nonfinancial credit to gross domestic product (GDP) has moved up a little in recent years to about its level in the mid-2000s but remains well below its recent peak. Valuation pressures in some asset classes have been rising, particularly late last year.

 

Asset valuation pressures have increased, on balance, since mid-2016, along with several indicators of investors’ risk appetite. Although yields on Treasury securities and term premiums increased as market expectations about future growth shifted higher in the fall, they both remain low. In addition, the spread of yields on corporate bonds over those on comparablematurity Treasury securities narrowed. Estimates of risk premiums in equity markets also declined. Outstanding riskier corporate debt edged down over the past year, but gross issuance of leveraged loans was strong and the share of bond issuance rated B or below remained in the fourth quarter at the high end of its range over the past few years.

 

Commercial real estate (CRE) valuations, which have been an area of growing concern over the past year, rose further, with property prices continuing to climb and capitalization rates decreasing to historically low levels. While CRE debt remains modest relative to the overall size of the economy and the tightening in bank lending standards for CRE loans in the second half of last year may reflect some reduction in the appetite for CRE lending, the heightening of valuation pressures may leave some smaller banks vulnerable to a sizable CRE price decline. Also, residential home prices continued to rise briskly through November.

Of course, considering that we are now nearly two years, and 300 points higher, after Yellen's May 2015 warning that "I would highlight that equity market valuations at this point generally are quite high," adding that "there are potential dangers there", expect the market to fully ignore today's warning too.

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LawsofPhysics's picture

Yes, yes, and in the current "mark to fantasy" world where there are no real collateral requirements for money creation the Fed has been enriching it's owners through the ongoing THEFT of real wealth since 1971!!!!

Hyperinflation on a global scale is on the way.  Get long sharecropping (for the 90%) and guillotines (for the 10%, if we are lucky...).

Muad'Grumps's picture

I prefer woodchippers. Feet first with the outflow going into the National Mall.

asteroids's picture

You have NO way to measure risk or "leverage" when you have mark to fantasy. Grrr.

MaxMax's picture

Not to be obtuse, but the Fed is the one that created the bubble.  We have had near zero interest rates for how long now?  There are traders on Wall Street that have never seen interest rates above zero. 

bwh1214's picture

It sounds to me like they are looking to pop the bubble they created.  In their view I think they believe they have the perfect scape goat in the Whitehouse.

 

This video series is the Econ 101 we all should have had in school.  It’s sad that most never learn the history of one of the most important things in our lives…Money.  It’s by design though. 

LawsofPhysics's picture

Go ahead and pop it!!!  The problem for all the Fed officials and board members is that everything that they have said is on record and in contrast to their mandate. As many others have pointed out, they have violated their charter many times, the debt is fraudulent and retribution will be paid one way or another.

Jäger's picture

Trump better pop the bubble soon- if the "markets" crash after next spring there is no way he gets a second term

NihilistZerO___'s picture

I think a second term is very likely, mainly because Trump won't let the media frame the debate.  He's going to throw the FED under the bus and as a RE guy he's going to point out the BENEFIT that lower RE prices bring to most Americans.  Rents and mortgage nuts are about to drop substantially when ownership is at historic lows. That's a winner politically. And even though the markets and RE will tank, the infrastructure spending project is going to generate a lot of middle class jobs and increase the velocity of money.  Much like years 3 and 4 of Clinton's presidency, I expect a jobs pickup right when RE hits a bottom. 1995/1996 was a great time in this country. Probably the best time of incomes vis-a-vis RE prices in metro areas in the past 3 plus decades.

Also the Democrat's bench sucks ass...

LawsofPhysics's picture

How's that all going to work with global trade in FRNs declining?

"Full faith and credit"

NihilistZerO___'s picture

That's what the implosion of Housing Bubble 2.0 and the Nationalist economic policies will resolve.  Tons of FRNs stored in residential RE are about to evaporate as even more are pulled out of buying foreign imports and even more are invested in doemstic infrastructure spending.  The dollar is about to look very attractive I bet.  Cleanest dirty shirt by far.

DogeCoin's picture

 

Best market in our lifetimes?

Worst market in our lifetimes?

BigFatUglyBubble's picture

not good(best), not bad(worst), but the ugliest

Bill of Rights's picture

Now all of a sudden they care ha ha ha ha this is hilarious to witness.

LawsofPhysics's picture

Mr. Yellen is concerned that a constitutional congress might take her fucking head.

She is right to be concerned!!!

NihilistZerO___'s picture

First non (((Globalist))) FED chair in 40 years???  That's some "diversity" I can get behind.

TAALR Swift's picture

Yellen is part of a Hydra. A figure head, a puppet. 

Soul Glow's picture

The Fed makes great no shit statements.

VarenneRiver's picture

Fed: our smoke machine is running out of gas, and all our mirrors are breaking.

BigFatUglyBubble's picture

Mirror mirror on the wall, who is the unfairest of them all?

micksavage2010's picture

vampires have no reflection in mirror...

ipso_facto's picture

'Fed: our smoke machine is running out of gas, and all our mirrors are breaking.'

Translation: we're no longer covering for the globalists

Cardinal Fang's picture

one man's asset is another man's ass.

Consuelo's picture

 

 

The 'CRE' building I occupy (Bay Area, CA) at the 'height of the bubble' in 2005 was valued at $1.2M (10k sq. ft.)    Today, it is $2.8M...

 

'Real' market value: Somewhere in the area of $500k - perhaps a lot less even, given how hard 'reality' finally hits.

shizzledizzle's picture

Yea it's leveraged to the hilt you dumb bitch... It seems you can't just jawbone forever and have people (bankers) percieve your threat as real. Yellen is the rough equivalent of threatening to burn someone's house down and standing at the road throwing lit matches into the wind. Oh wait I forgot, a .25 bps increase... Careful now there is a lit match in the green grass.

MrBoompi's picture

These fuckers are unreal.  The Fed sat idly by while leveraged increased to idiotic proportions.  Some regulators they are.  They don't even seem to realize they are criticizing their own performance.  Aunt Janet is just the latest in a long line of bankster puppets who can't admit all of their policies are designed to make bankers rich at the expense of the general population.  Slow devaluation and inflation are desired, as a quick theft might lead to the pitchforks.  

Barney08's picture

Whole thing is a f-ing yawn. There will be precious little done if anything done to react to her testimony, No. Kor, Iran, Greece, Frexit, debt ceiling, the S&P closes green today, tomorrow, and on and on.      

LawsofPhysics's picture

Correct, global Weimar!

hedge accordingly.

Snaffew's picture

wow...these markets are high...and they are HIGGHHH!! Fucking unreal.

micksavage2010's picture

shorter fed bullshit: u normal mortals need a gigantic financial enema cuz u still got a frn in ur pocket. u need a translator also to swallow the mierda we feed u.

khakuda's picture

Yellen owns this bubble.  Her opportunity to moderate the blowoff in asset prices has long past and she continues to sit on her hands.  It's too late now, the parabolic move skyward is underway.  Each insignificant 25 bp rate increase will be met with a market that spikes even higher.  The market is telling her she is behind the curve.  It is actually screaming at her deaf ears.

Batman11's picture

We all wait for the Central Bankers announcements on how they going to guide the economy.

Each announcement sounds like the words of the wise coming down from on high.

The global economy is in the new normal of secular stagnation.

The bigger picture can be quite telling.