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Too Low for Too Long?

With U.S. equity markets making new record highs on a weekly (if not daily) basis, there’s been a notable increase in the amount of “bubble talk” recently, said talk normally reaching a crescendo in the days leading up to another Federal Reserve policy meeting.

That’s exactly what’s happening early this week in advance of a gathering of central bank officials as reports like Is the Fed fueling a giant stock market bubble? at USA Today via Motley Fool present graphics like the one below before answering their own question with an emphatic ‘No’. Stock investors are comforted with logic such as “the fact that the Fed’s monetary policies have caused stock prices to soar, doesn’t mean there’s a bubble”.

A more thoughtful take on the subject is offered up by none other than Dallas Federal Reserve President Richard Fisher who notes The Danger of Too Loose, Too Long in the Wall Street Journal that includes the following conclusion:

…with low interest rates and abundant availability of credit in the nondepository market, the bond markets and other markets have spawned an abundance of speculative activity.

There are some who believe that “macroprudential supervision” will safeguard us from financial instability. I am more skeptical. Such supervision entails the vigilant monitoring of capital and liquidity ratios, tighter restrictions on bank practices and subjecting banks to stress tests. All to the good. But whereas the Federal Reserve and banking supervisory authorities used to oversee the majority of the credit system by regulating depository institutions, these institutions now account for no more than 20% of credit markets.

My sense is that ending our large-scale asset purchases this fall will not be enough.

I’ll never forget former Fed Chief Alan Greenspan telling Congress back in 2004-2005 how U.S. banks showed no signs of stress when, meanwhile, the “shadow banking system” was a veritable Wild West in mortgage lending. I’d say the odds are pretty good that the term “macroprudential supervision” will come back to haunt current Fed Chair Janet Yellen.

Warren, Yellen, and Too Big to Fail

It appears they left the best for last yesterday as Sen. Elizabeth Warren (D-MA) closed out day one of Fed Chair Janet Yellen’s semi-annual monetary policy report to Congress with this wholly unsatisfying exchange about too-big-to-fail banks (hat tip Not Quant).

Skip to the 1:34:45 mark of the entire CSPAN video here to find another interesting exchange, this one with Sen. Tom Coburn (R-OK) where Yellen is asked whether it might not be a better idea to just not create so many asset bubbles to begin with.

Well, he didn’t exactly ask it like that…

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Now that the U.S. team has been eliminated from the World Cup, we ‘Mericans can focus on what we really do best – inflating asset bubbles – and that effort should be bolstered by what is shaping up to be a big number in the nonfarm payrolls data due out from the Labor Department on Thursday, just prior to the nation celebrating its 238th birthday on Friday.

From these two reports at Gallup come the charts below indicating all systems are go.

Of course, it doesn’t hurt that payroll processor ADP reported earlier today that the private sector added 281,000 jobs last month, the biggest job creation total since November 2012.

This should be much more fun than watching soccer…

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The Institute for Supply Management reported that the U.S. manufacturing sector continued to expand at a healthy pace last month as their purchasing managers index was little changed, down slightly from 55.4 in May to 55.3 in June. Recall that, in this index, readings above and below 50 indicate expansion and contraction, respectively.

The key new orders component improved from 56.9 in May to 58.9 in June, production fell from 61.0 to 60.0 (still indicating robust growth), and employment was unchanged at 52.8. A full 15 of the 18 industries tracked by ISM reported growth last month.

Pricing pressure eased somewhat as this component fell from 60.0 to 58.0, backlog orders fell from 52.5 to 48.0 (indicating contraction), and inventories were unchanged at 53.0.

Obviously, the stock market likes this news quite a bit.

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