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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.

Housing Starts, Permits Drop Sharply

The Commerce Department reported(.pdf) that housing starts and permits for new construction came in well below expectations last month, casting fresh doubt on the sustainability of the housing market rebound.

Housing starts fell 9.3 percent in June to a seasonally adjusted annual rate of 983,000, this coming after a drop of 7.3 percent in May that marked the worst two-month decline since late 2010, save for the sharp winter slowdown six months ago.

Building permits dropped 4.2 percent last month to a rate of 963,000 after a falling 5.1 percent the month prior, all but reversing the spring rebound.

From year ago levels, construction is still higher – up 7.5 percent for starts and 2.7 percent for permits – however, the recent trend should be disconcerting for anyone thinking that the construction industry was on a path back toward more normal levels as the latest readings are still nearly 50 percent below the pre-housing bubble norms.

In a separate report released yesterday, the National Association of Home Builders’ Housing Market Index rose to a six month high, due largely to an optimistic outlook for sales over the next six months.

In a survey where numbers above and below 50 indicate better or worse, respectively, the overall index jumped from 49 in June to 53 in July with the sales expectations component jumping 6 points to 64 and current sales rising 4 points to 57. Buyer traffic continues to be disappointing at just 39, however, it did rise 2 points this month.

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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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