Charts: Yellen’s No Build Up in Leverage and No Price Misalignments

At the confirmation hearing in the halls of the US Congress, incoming US Fed Chairwoman Janet Yellen testified[1]

I don’t see evidence at this point, in major sectors of asset prices, misalignments. Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage, where the development of risks that I think at this stage poses a risk to financial stability.

The following is a showcase of charts and reports from which Ms. Yellen “don’t see a broad buildup in leverage” and “don’t see evidence at this point, in major sectors of asset prices, misalignments”

“No build up in leverage”

US commercial and Industrial loans are at 2007 highs. Consumer loans have equally been climbing now approaching 2010 levels.

US banking exposure to the commercial real estate sector has been skyrocketing where CRE loans outstanding notes the Institute of International Finance (IIF) now stand at some USD 200 billion above pre-crisis levels.

Also US mortgage REIT assets have more than tripled since the crisis. Yet the IIF warns US REITs are vulnerable to disruptions in repo markets, as repo market funding constitutes 90% of their liabilities[2]

U.S. covenant-lite loan issuance has soared past 2007 levels now at $210 billion year to date—“a multi-year record and almost three times that of last year” according to IIF.

US companies have reportedly been selling bonds at the fastest rate ever or on record as companies try to beat potential rate increases.

According to the Wall Street Journal[3],

The $1 trillion mark was passed in the 46th week this year, according to Dealogic. In 2012, the mark was passed in the 48th week, and in 2009, the mark was passed in the 50th week. Despite the record issuance, investment-grade corporate bonds haven't had a stellar year. They have posted a 1% negative return this month and a 2.16% negative return so far this year, according to Barclays

“No misalignment of prices”

The Wilshire US REIT Trust Total Market has passed the 2007 highs.

US Farmland prices has exploded vertically. The chart represents Iowa’s farmland prices based on the first semester of the year[4].

Although declining prices of commodities has been expected to slow simmering prices farmlands

From the Wall Street Journal[5]

A multiyear run-up in the value of farmland in the U.S. Midwest may be running out of steam.

Average cropland prices declined in parts of the Farm Belt in the third quarter from the previous quarter while rising at a low rate in other areas, according to separate reports this past week by regional Federal Reserve banks in Chicago, St. Louis and Kansas City.

The surveys also found that some agricultural bankers expect cropland prices to decline across the Farm Belt as 2014 approaches because big harvests this fall have driven grain and soybean prices sharply lower. Corn prices also are expected to weaken after the U.S. Environmental Protection Agency on Friday proposed for the first time lowering an annual requirement for how much ethanol should be blended into gasoline.

Talk about record prices. Last week’s art auction $380.6 million at the Sotheby’s nearly hit a record high previously set at $394.1 million. Nonetheless record auctions, according to a Bloomberg report[6] were set for seven artist including Andy Warhol, Cy Twombly, Agnes Martin and Martin Kippenberger.

Francis Bacon’s ‘Three Studies of Lucian Freud’ reportedly sold for $142.4 million at Christie’s to Acquavella Galleries which bested bested Edvard Munch’s ‘The Scream’. Meanwhile Jeff Koons sold his sculpture “Balloon Dog (Orange)” for $58.4 million, an auction record for a living artist, according to another Bloomberg report[7].

Soaring stock market prices, REITs at over 2007 highs, parabolic farmland prices and record art prices have been seen as no misalignment of prices. This time is different.

Frenzied Global Bonds

 

 

Around the world, global issuance of leveraged loans has vastly surpassed 2007 highs. Global corporate bond issuance particularly on High yield bonds has also reached records.

An update on this from the Financial Times[8] (bold mine)

Global borrowers with weaker credit quality are taking advantage of investors’ relentless search for higher yields to sell a record amount of bonds so far in 2013.

Intelsat, the world’s largest satellite-services company, the US casino owner Caesars Entertainment and the luxury chain Neiman Marcus have been among the low-rated borrowers to have sold a combined $38.1bn debt this year, according to Dealogic. That amount surpassed the previous record of $37bn for the whole of 2012.

Bonds with the lowest possible credit ratings have soared in popularity with investors, who have been diverted from top tier government and corporate debt where central banks are suppressing interest rates.

In today’s world, there is no such thing as default risks. Everybody has been piling up on one another to bid for companies even with the worst credit rating. That’s because zero bound rates and QEs has been seen to last forever.

Same record high story with global catastrophe bonds and non record but rapidly rising Global Payment in Kind Bonds

See NO bubble. Move along, nothing to see here.

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[1] Bloomberg.com Yellen Signals Continued QE Undeterred by Bubble Risk November 15, 2013

[2] Institute of International Finance November 2013 Capital Markets Monitor and Teleconference

[3] Wall Street Journal Companies Sell Bonds at Fastest Pace on Record November 14, 2013

[4] Irreplaceable Capital The Butterfly Effect June 15, 2013

[5] Wall Street Journal Midwest Farmland Values: Past Peak Season? November 15, 2013

[6] Bloomberg.com Warhol ‘Crash,’ Steve Cohen’s Richter Lift Sotheby’s Sale November 14, 2013

[7] Bloomberg.com Bacon, Koons Set Major Records in New York at Christie’s November 13, 2013

[8] Financial Times Record sales of lowest rated bonds November 14, 2013

US Stocks on a Record Melt Up on Yellenomics and ECB’s QE!

US stocks are on a “Wile E Coyote running off the cliff” momentum.

Here is media’s narrative of last night's record setting run by US stocks. From Bloomberg

U.S. stocks rose, sending benchmark indexes to records, as Macy’s Inc. led a rally among retailers and investors speculated the Federal Reserve’s Janet Yellen will continue the central bank’s stimulus policy as chairman….

The melt up frenzy mode in US stock markets has been broad based. All four major benchmarks from the S&P 500, Dow Jones, Nasdaq and the Russell 2000 have performed strongly.

And here is what has spurred the fantastic run… (bold mine)

Yellen, nominated to be the next chairman of the Fed, said the economy and labor market are performing “far short of their potential” and must improve before the central bank can begin reducing monetary stimulus

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen, the Fed’s current vice chairman, said in testimony prepared for her nomination hearing tomorrow before the Senate Banking Committee. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

The remarks show Yellen is committed to the central bank’s strategy of attempting to boost the economy and lower 7.3 percent unemployment, more than four years after the economy began to recover from the longest and deepest recession since the Great Depression.

Today’s stock market guidance: Bad news is good news. Bad news means more policies to implicitly redirect or to transfer resources from the real economy to the stock markets. Therefore, US stocks have nowhere to go but up

And it’s not just about Yellonomics. The European Central Bank hinted that Europe’s version of QE may be on the way,  from Reuters:

European Central Bank Executive Board member Peter Praet on Wednesday raised the prospect of the central bank starting to buy assets to bring inflation closer to its target, one of the central bank's most divisive tools.

He also suggested that the ECB could still create negative deposit rates, essentially charging banks to place their money with it.

Zero bound rates, QE, negative deposit rates: central bankers want to eviscerate everyone’s savings in the name of “growth”.

But obviously ballooning central bank balance sheets have hardly translated to “growth”, even the statistical ones. 

"Far short of their potential" has been the dynamic since 2008. It never ends. It seems like endlessly "Waiting for Godot"

The other reason central bankers are supposedly conducting even more easing has been to “combat deflation”.

Bizarrely, by selectively focusing on the CPI index, the mainstream ignores the frenetic stock market melt up yet declares “deflation”. It is as if stock markets operate on different dimensions from the real world.

Such equivocations has been media's du jour feature.

Today’s headlines from the Guardian on Spain’s supposed deflation “Deflation fears stalk eurozone as Spain reports fall in prices” is a good example 

Spain became the latest European country to report sliding prices, underlining fears that with inflation already at 0.7% across the 17 country single currency area in October, sky-high unemployment and a prolonged economic malaise may be dragging the eurozone towards a Japanese-style deflationary slump.

Madrid said prices in the crisis-hit country declined by 0.1% in the year to October, adding Spain to a list of countries – including Ireland, Greece and Cyprus – that are already mired in deflation.

The above is Spain’s stock market benchmark the Madrid General Index. Deflation in stocks?

Falling yields from Spain’s 10 year bonds means a rally in Spain’s bonds. Deflation on bonds?

So while it may be half true where CPI indices for crisis affected countries may have been in a decline, whatever loss in CPI has been offset by rallying financial markets.

Again such phenomena have been indicative of an ongoing shift of resources from main street to the banks, the financial industry, to the government and to relative fewer market participants occurring throughout the world, but mostly led by the US.

Yet the widespread engagement by media of doublespeak to justify these central bank interventions.

Ironically there has even recently been an “inflation” spike in the search for the term “deflation” in Google trends! Deflation, where?

Novelist George Orwell Power warned of such manipulation of information or "doublespeak" in his prescient classic 1984  

Power is in tearing human minds to pieces and putting them together again in new shapes of your own choosing.

Video: Peter Schiff on The Myth Surrounding Janet Yellen's Forecasting Record

Mainstream media glorifies incoming Fed Chairwoman Janet Yellen's forecasting track record for supposedly having warned against the 2008 crisis. 

Using Ms. Yellen's speeches and public pronouncements as basis, financial analyst Peter Schiff, in the following video, debunks such claims as inaccurate and an exaggeration.

This is important because the consensus seems to have massively build their hopes and optimism around Ms. Yellen's leadership. In reality, what the mainstream  has been cheering about has been the prospects of bigger inflationist policies, which signify as subsidies to Wall Street and politicians at the expense of main street. This also means that the mainstream expects Ms. Yellen to accommodate bigger and bigger systemic debt.

Worst, should Ms. Yellen's administration oblige to Wall Street's desires, then we should expect a bubble bust under her watch. 

Again as pointed out in the past, outgoing Fed chief Ben Bernanke must have been cunning enough to have bailed out and passed the burden of bubbles to his successor.

(hat tip Zero Hedge)

Bernanke Replacement Janet Yellen to be Nominated, First Female Fed Chair

Outgoing Fed chair Ben Bernanke will be officially replaced by Ms. Janet Yellen.

From Bloomberg:

President Barack Obama will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program and the first female leader in its 100-year history.

Obama will announce the nomination at 3 p.m. today in Washington, a White House official said in an e-mailed statement. Yellen, 67, would succeed Ben S. Bernanke, whose term expires on Jan. 31.

Obama turned to Yellen, vice chairman of the Fed since 2010, after the other leading candidate, former Treasury secretary and White House economic adviser Lawrence Summers, withdrew from consideration amid mounting opposition from Democrats on the Senate Banking Committee

Here is a timeline of Ms. Yellen’s career

Here is Dr. Marc Faber’s comment on Ms. Yellen as previously posted here

She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted.And don't believe a minute the inflation figures published by the bureau of labor statistics. You live in New York. You should know very well how much costs of living are increasing every day. Now, the consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom and you have people like Mr. De Blasio, who comes in and says let's tax people who have high incomes more. And, of course, immediately, because in a democracy, there are more poor people than rich people, they all applaud and vote for him. That is the consequence.

Rising financial markets as of this writing appear to reflect on the cheering her nomination as she will likely reward Wall Street and governments around the world with more gifts from money printing.

Asian policymakers also warmly welcomes Ms. Yellen. The Wall Street Journal Real Times Economic Blog quotes Philippines Finance Secretary Cesar Purisima 

More importantly, Ms. Yellen’s nomination signals a commitment to stability, continuity, and a smooth transition at the Fed. Ms. Yellen was one of Chairman Bernanke’s co-pilots as they navigated the turbulence of the global financial crisis, as well as the uncertainty of its aftermath. On their watch, the United States was saved many times from economic disaster, and I am confident that her leadership will continue to ably guide the Fed,” he said.

"Saved" many times from disaster of their own creation? Yet will Ms. Yellen’s regime really be about stability and continuity or about shifting resources from mainstreet to the government and their cronies? 

Or has Dr. Bernanke been smart enough to bail out of the FED while setting up Ms. Yellen for a trap? 

The chart from Austrian economist Bob Murphy shows of the baptism of fire (S&P crash) for the newly appointed Alan Greenspan and Ben Bernanke. 

Will Ms. Yellen suffer the same fate too?