Thursday, May 09, 2013

Bankers Warn US Federal Reserve of Bubbles in Farmlands and Student Loans, More Signs of US Asset Bubbles

Aside from record high stock markets underpinned by exploding net margin debt, there are many side-effects from the Fed’s bubble blowing policies.

Bankers themselves are now warning the US Federal Reserve of asset bubbles evident in farmland and in student loans

From Bloomberg:
A Federal Reserve (TREFTOTL) panel of bankers warned policy makers in February that record stimulus was pushing financial institutions to take on more credit risk and creating a “bubble” in the price of U.S. farmland.

“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said on Feb. 8, following a Federal Open Market Committee meeting on Jan. 29-30.

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the farmland bubble chart courtesy of the Zero Hedge

More on the farmland bubble
The panel also said in February that farmland valuations posed an asset-price bubble caused by unusually low interest rates, echoing concerns expressed by Kansas City Fed President Esther George.

“Agricultural land prices are veering further from what makes sense,” according to minutes of the council’s Feb. 8 gathering. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.”

The Fed pledged to hold the benchmark interest rate at zero until the unemployment rate falls to 6.5 percent, as long as inflation expectations don’t exceed 2.5 percent. The U.S. central bank has also engaged in three rounds of bond purchases, known as quantitative easing.

Data compiled by the regional Fed banks have documented a rapid run-up in farmland prices, particularly across the Midwest’s Corn Belt. The Kansas City Fed said irrigated cropland in its district rose 30 percent during 2012, while the Chicago Fed reported a 16 percent increase.

The panel of bankers is appointed by regional Fed banks and dates to the founding of the central bank in 1913. Bloomberg obtained minutes from the quarterly meetings from May 2011 until February.

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Student loan bubble chart from the Zero Hedge

Now the student loan bubble
At a meeting in February 2012, the council said “growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis.”

Student lending shares features of the housing crisis including “significant growth of subsidized lending in pursuit of a social good,” in this case higher education instead of expanded home ownership, the council said.
Bubbles have been ballooning in many areas.

Corporate bonds has likewise been exploding.

From another Bloomberg article:
Sales of bonds from the U.S. to Europe and Asia exceeded 2012’s pace after offerings surged this month to at least $318 billion, compared with $205.3 billion in the similar period last year, Bloomberg data show. Issuance lagged last year’s pace during the first quarter, falling 7.6 percent behind a record $1.174 trillion in the first three months of 2012.
A lot of these bond issuance have been used as vehicles to buyback on stocks in response to tax policies and the cheap money environment that has led to the record levels.

This is why both the US bond markets and stock markets are becoming intertwined.

And more signs of the tightening relationship between stock market and bonds: the bond fund hybrids

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The number of bond funds that own stocks has surged to its highest point in at least 18 years, another sign that typically conservative investors are taking bigger risks to boost returns.

Regulators generally allow funds to hold a mix of assets, but the scale of bond funds' shift into stocks is unusual, fund experts said, and could expose investors to unexpected losses.

In all, 352 mutual funds that are classified by Morningstar Inc. as bond funds held stocks as of their last reporting date, up from 312 at the end of 2012 and 283 in the first quarter of 2012, according to the investment-research firm.

The rush into stocks illustrates the dilemma bond investors face. The bond market has rallied for much of the last 30 years, and yields, which move in the opposite direction of prices, stand near record lows.
Tightening interdependence of stocks and bonds makes both asset classes equally vulnerable to market shocks.

The deepening of inflationary boom has led credit swaps falling into 5 year lows which are signs of increasing complacency.

Collateralized debt obligations (CDOs) “bad boys of the financial crisis of 2008” according to the Wharton Knowledge, have also been making coming back.

There are many more signs of bubbles being blown. So it would be na├»ve or downright silly to suggest or proclaim that there has been “no-side effects” from Fed Policies.

Remember inflationary booms leads to deflationary bust. And a bust will likely spur the US Federal Reserve to double or more the $85 billion a month in bond purchases which may expand to include other assets. 

All these means two things: more bubbles or a currency collapse.

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