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

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.

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.

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

From the Wall Street Journal

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 naïve 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.

Agricultural Boom Fuels Farmland Protectionism

Agricultural protectionism rears its ugly head again.

As prices of food continue to surge, a farmland boom in the US and elsewhere has been taking place. And some governments along with participating private sectors have been adding to the demand pressures for international farmlands.

Unfortunately, xenophobia and anti-market sentiments have prompted some nations to impose restrictions on agriculture land ownership.

The New York Times reports, (bold highlights mine)

Even as Brazil, Argentina and other nations move to impose limits on farmland purchases by foreigners, the Chinese are seeking to more directly control production themselves, taking their nation’s fervor for agricultural self-sufficiency overseas.

A World Bank study last year said that volatile food prices had brought a “rising tide” of large-scale farmland purchases in developing nations, and that China was among a small group of countries making most of the purchases.

Foreigners own an estimated 11 percent of productive land in Argentina, according to the Argentine Agriculture Federation. In Brazil, one government study estimated that foreigners owned land equivalent to about 20 percent of São Paulo State.

International investors have criticized the restrictions. At least $15 billion in farming and forestry projects in Brazil have been suspended since the government’s limits, according to Agroconsult, a Brazilian agricultural consultancy.

“The tightening of land purchases by foreigners is really a step backwards into a Jurassic mentality of counterproductive nationalism,” said Charles Tang, president of the Brazil-China Chamber of Commerce, saying that American farmers had bought sizable plots in Brazil in recent years, with little uproar.

Responding to the criticism, Brazil’s agriculture minister said this month that Brazil might start leasing farmland to foreigners, given the barriers to ownership.

China itself does not allow private ownership of farmland, and it cautioned local governments against granting large-scale or long-term leases to companies in a 2001 directive. China also bans foreign companies from buying mines and oil fields.

Agriculture has been the least globalized sector owing to regulatory and sundry political hurdles.

Proof of this is that global agricultural tariffs has substantially been higher than non-agricultural products.

So trade restrictions has impelled other private and public entities (such as international governments) to try to circumvent national trade restrictions by acquiring land or by providing financing to domestic food producers in return for the assurance of access to future production. [charts from Amber Waves, US Department of Agriculture]

From my end, aside from imbalances erected by local regulations and political privileges (e.g. subsidies), rising prices are likewise consequences of inflationism. This means that the upward trend in food prices and subsequently the demand for farmlands have been either artificially inflated or possibly reflects on a monetary malaise as seen through a “flight to real values”.

Besides, as we have predicted, this boom will continue to deepen as government introduce more market distorting measures.

So far, the global campaign to secure food supplies have been coursed through cooperative channels via trade and investments, in spite of current emergent signs of protectionism.

Otherwise, we should keep in mind that the close door policies will only lead to mutually undesirable consequences.

As the great Frederic Bastiat (1801-1850) warned,

If goods don’t cross borders, armies will

Are US Farmlands the Next Bubble?

From Bloomberg’s Chart of the Day

U.S. farmland may turn into “the next big speculative bubble” as prices climb, according to Robert J. Shiller, a Yale University economics professor.

The CHART OF THE DAY shows that the value of agricultural land in the upper Midwest has doubled since 2002, according to data compiled by the Federal Reserve Bank of Chicago. The chart also depicts farm values in inflation-adjusted terms, which are approaching their highs from the 1970s. The region encompasses Illinois, Indiana, Iowa, Michigan and Wisconsin.

Shiller, whose book “Irrational Exuberance” foreshadowed the end of the 1990s surge in stocks, wrote yesterday that farms are “my favorite dark-horse bubble candidate for the next decade or so.”…

“Farmland, as least in certain places, seems to have the most contagious ‘new era’ story right now,” Shiller wrote. He cited the risk of food shortages related to global warming as contributing to a boom in the U.K., along with the U.S.

The price trends of farmlands (not only in the US) will almost entirely depend on the actions of the commodity spectrum. If the US and other governments continue to massively inflate, then commodities will respond accordingly. Farmlands will subsequently respond too.

It would signify as utter nonsense to say that everything that goes up represents a ‘speculative bubble’. This assumes that current conditions are hunky dory except for the ‘irrational exuberance’ by the marketplace.

Yet one would realize that it isn’t just farmlands but also the technology sector showing semblance of ‘bubble’ actions. The point being—you won’t have symptoms of bubbles (in the US and elsewhere) without fuel to inflate them.

And $6.4 trillion question is who’s been providing that?

Besides, hasn’t it been the morbid fear of falling prices that has led to the corresponding policies designed to boost prices higher?

Essentially surging farmlands (and commodities) represents the proverbial “be careful of what you wish for” pathology.

Irrational exuberance represents the secondary cause and not the main mover.

Shopping For Farmland?

An ocean of money from global central banks is about to flow into commodities which should trigger a boom.

And as legendary investor Jim Rogers predicted, ``Power is shifting now from the money shifters, that got us to trade to paper and money, to people who produce real goods, whether it is agriculture or mining or whatever. This has happened many times in history, what you should do is become a farmer, or you should go and start a farming network. That’s what you do, because in the future the farmers are going to be one of the best professions you can possibly have."

And farming as the next sunshine profession should also mean a boom in farmlands.

And where are the best priced farmlands?

According to the Economist, ``FARMLAND has outperformed the property market in many countries. Investors rushed into agricultural land as food prices soared, helping to push up prices. A hectare of farmland in England increased by 16% (in sterling terms) in the year to January 2009, according to a new report by Knight Frank and Citibank. And even against a resurgent dollar this equates to $17,100 a hectare, the highest among the countries shown. Canada looks a bargain by comparison with neighbouring America: prices are around a tenth of the $11,000 a hectare paid in Ohio. The prospects for eastern Europe are bleaker, thanks to poorer infrastructure and economic prospects. Farmland in Ukraine fell by 75% to $125 a hectare."

The economist chart above doesn't cover much of farmland prices in emerging markets.

Yet not all farms are equal-there will always be the issue of infrastructure (farm to market), accessibility to water, government regulations, soil quality or structure, climate, security and etc...