Fed's Kaplan Admits Stock Valuations Are Elevated, But He's Not Worried For One Reason

Tyler Durden's picture

There were two explicit warnings about stock market valuations in the latest Fed Minutes: first, the Fed warned that "vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets." Then, in an odd admission, the Fed said that "recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services." In other words, the entire premise behind the "wealth effect" - the assumption that high stock prices will lead to a boost in spending - may have been, oops, wrong.

One day later, Dallas Fed president Robert Kaplan picked up where the minutes left off with a discussion of market valuations, and said that while risks associated with high stock valuations may be "elevated" he is not worried; what he is worried about “is a correction accompanied with leverage.”

"Market valuation alone isn't enough for me to be alarmed" Kaplan said, explaining that "the thing I’m looking for is the buildup of excesses beyond the valuations - particularly the leverage."

In other words, the Fed is no longer worried just about asset bubbles: it is worried about asset bubbles on margin, and while the market may be at all time highs, just because the Fed is convinced that there is no leverage involved in trading it is not concerned.

This, of course, is patently incorrect, and while it is painfully obvious to any trader just how wrong Kaplan is, the simple explanation for his delusion is that if one looks away from simple margin debt (which incidentally is also near all time highs), the real leverage these days is in Vol-related products: options, futures and ETFs, and it is here that as we showed last week before the VIX explosion, leverage, in the form of VIX-linked Vega has never been higher.


That said, we don't expect the Fed to understand any of this until well after the next crash that will wipe out everyone who has been selling volatility for the past several years, comfortably assuming that the Fed will always have their back.

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Government needs you to pay taxes's picture

Good thing there isnt any buildup of debt.  All 100% serviceable.  Excuse me while I wipe my ass with a fresh roll of Benjamins.

The Cooler King's picture

"Fed's Kaplan Admits Stock Valuations Are Elevated, But He's Not Worried For One Reason"


He misspoke:


- (((WE))) have our finger on the Ctrl+P button

- (((I'm in the tribe))) & own stocks


That's 2 reasons


JRobby's picture

They have been hiring at PPT

Swampster's picture

The ashkeNAZI jew admits what?

jcaz's picture

Either the dude is ignorant or fatuous-  tough to tell, given the source.... $20T of debt isn't "leverage"?  Only to a delusional academic;

Only the truly clueless think that leverage is low,  only the truly cuckholded say that it is low.


Offthebeach's picture

Well the wealth effect certainly worked for the first to get the red hot fiat off the press, or poor things, have the Fed shove free credit down their fat gullets when everyone is fire selling assests.


Justin Case's picture

"Market valuation alone isn't enough for me to be alarmed" Kaplan said

or woodif he sed

"Market valuation are in the biggest bubble in the entire history of the stock markets and you can't even begin to imagine how alarmed the Fed and I are" Kaplan said

One of the statements is the truth. You decide.

Son of Captain Nemo's picture


The schizophrenic rantings of a deranged psychopath when "both" personalities come to grips "with what they've done"!

GUS100CORRINA's picture

Fed's Kaplan Admits Stock Valuations Are Elevated, But He's Not Worried For One Reason

My response: ROFL!!!! Another goose stepping moron wanting to share his wisdom and guidance with the rest of us right before the FED pulls away the PUNCH BOWL.

Don't worry, be happy and have another pina colada!!!!

Kidbuck's picture

Stocks ain't elevated the fed is fucking the buck and it's worth less every day.

oDumbo's picture

That's the simple truth.  The dollar is becoming toilet paper.

VWAndy's picture

 Letme guess. He is running the printer?

JRobby's picture

His bunker is ready and he has secure transportation to get there. When chaos breaks out, so many plans go bad.

Justin Case's picture

One thing that is a bad sign is the Dow transport index. It's not following the Dow index. It looks like a lame dick on the chart compared to the DOW index.

c2nnib2l's picture








Osmium's picture

Come on in, the water is fine!

DEMIZEN's picture

when soviet union collapsed crooks like this one were the first ones to abandon the ship with liquid, washed millions in safe havens ready to parasite a new host.

small axe's picture

as dumb and desperate as a brick shithouse (on fire)

lester1's picture

Kaplan knows darn well the Fed has been covertly buying stocks and that the market can never back down due to everyones 401ks and Pensions being tied to the stock market.

PontifexMaximus's picture

It's not only und n the US like that

Bill of Rights's picture

Funny how all this Alt Right Nazi connection bull shit came out right after this Article was produced. Coincidence? hardly.

Dinesh D’Souza: What Hitler Learned from the Democrats


Rich Monk's picture

The Fed. - Jews leading the Christians to slaughter for profit.

gmak's picture

Leverage is near the highest it's ever been - second only to 2008, right?  Valuations are near the highest it's ever been - second only to 2000, right?  Exactly what does it take to be concerned these days?  Is this going to be like when a stock crashes to nothing and then the next day, the sell-side all issue "SELL" reports? 

Consuelo's picture



Remember those old Chevy Vega's with 327 small blocks?   There were even a few bolder types who managed to shoehorn the 454 in that little rattle trap.

'Vega' indeed. 

tangent's picture

So the fed makes the point that bubbles created by liability are worse than bubbles created by assets. If the excess is due to margin, then the correction to fair valuation can be an order of magnitude more quickly. So, the speed of the correction is faster. How is losing 20% in a day worse than losing 20% in three months? I don't understand their point. I could probably come up with reasons bubbles created by liability are actually less bad than bubbles created by assets. So, what are their metics for that judgement?

Stormtrooper's picture

Where is the PPT today?  Surely they have received a few semi-trailer loads of fresh $100 bills stacked on pallets.  Are they going to wait until the 3:30 ramp to do their thing?

Bunga Bunga's picture

LOL, stocks are tanking and the printer clowns are rushed into the arena. What a fucking shit show.

Secret Weapon's picture

Will someone please salp the smug off of his face. 

besnook's picture

banksters are only concerned about your ability to pay and the value of your collateral.

khakuda's picture

"We didn't know!  No one knew!  It wasn't our fault, it was someone else's.  Who could have guessed that by our keeping interest rates at zero and well below inflation for most of the decade that anyone would have engaged in speculation and leverage?"

ReturnOfDaMac's picture

Omigawd, 1% off, its a SALE!! 

Vlad the Inhaler's picture

I guess they didn't see the margin chart.

goldoverbtc's picture

Companies are taking out long term debt to buy back their own stock, i would call that margin.  so he should be worried in a big way!



itstippy's picture


Almost every corporation on the S & P has been "taking advantage of ultra low interest rates" for the past eight years by borrowing money and using it for stockholder dividends and stock buyback programs.  Corporate insiders make out like bandits on their stock options and bonuses, and shareholders are delighted at their returns.  The corporation itself, however, becomes so dangerously leveraged that it can't handle an economic downturn.

This is the same behavior that preceded the "Great Recession".  Years of corporate raiders buying up companies via leveraged buyouts and then piling on debt left companies extremely overleveraged.  



Son of Captain Nemo's picture

Moar "jagged" cliff -PLEASE!!!

Mena Arkansas's picture

"Market valuation alone isn't enough for me to be alarmed" Kaplan said, explaining that "the thing I’m looking for is the buildup of excesses beyond the valuations - particularly the leverage."

While the Fed quietly liquidates its equity portfolio into the greedy hands of the dumb retail crowd aka muppets.

Right before the Fed tightens credit causing the mother of all bear markets and a depression.

But only after they short a couple hundred billion S&P contracts to make their profit on the way down.

Easy to make money in the market when you know tomorrow's news today.

ZazzOne's picture

"He's not worried for ONE reason...", yeah he knows the Fed can create digital fiat notes out of thin air and funnel it thru Goldman Sach's Plunge Protection Team to prop up the market!!!!! Though this will only work up to a certain point at which the whole house of cards comes crashing down!

oobilly's picture

lemme guess ...He's in cash?

FlKeysFisherman's picture

I bet this guy has an escape plan to Israel.

Econogeek's picture

First I thought the Leftist Meltdown post was Thursday Humor but now I see I was wrong.