EconMatters: The conditions in so many asset classes are unsustainable from a price perspective once interest rates rise even under a “new normalized rate environment” and the longer rates stay at ZIRP status these unsustainable price levels continue to move in the wrong direction from a sustainability standpoint, i.e., the underlying fundamentals apart from ZIRP policy would not support said asset prices in a natural price discovery process.
Janet Yellen Always One Step Behind
Janet Yellen threw a bone to the valuation crowd with her brief discussion about certain parts of the market being overvalued, “Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year”. This is an obvious canned response since this question is routinely asked of the Chairperson in any question and answer session these days, “Do you see a bubble in markets?” And her previous canned response was according to our metrics of valuations….blah, blah, blah…..asset prices aren`t out of line with historical standards to paraphrase.
Social Media Bubble – Historically High Risk Reward Plays
Let me just say right here that forget talking about bubble conditions in Bio-Techs or Social Media as high valuations are pretty commonplace for these sectors in market history and investors know what they are getting into given their historic volatility and boom and bust cycles both in terms of stock prices and business sustainability.
Treasuries Aren`t Supposed to Get Bubbly Conditions as an Asset Class
Treasuries on the other hand haven’t had a history of speculative fervor in regards to ‘Bubbly’ conditions. Investors have always considered these safe places to hide out in terms of market turmoil and uncertainty and a very conservative asset class historically. It takes quite a feat to take a conservative asset class and turn it into a bubble!
US Treasuries have never been this mispriced and incongruent with an economy that is on pace to produce more jobs than any other time in the last 15 years, and this included the credit and housing booms with a Fed Funds Rate at 5.5%!
And I don`t want to hear that crap about these being low level service jobs, you still need a vibrant economy to have enough people and entities that need to be served to create this many ‘service jobs’! The numbers that are being created means a whole lot of people need more goods and services produced to justify businesses hiring more workers and not just the 1% crowd.
The Federal Reserve has gone off the rails, yeah this economy isn`t perfect far from it, but there is no way the Fed Funds Rate should be 25 basis points. Why would a bank ever lend when they can borrow at 25 basis points all the money they want, then buy some ‘safe’ Treasuries, and capture what they perceive as a risk-free arbitrage? This is the reason the GDP numbers are lagging, everything from CAP EX spending sacrificed for stock buybacks to banks chasing yield instead of creating small business loans is all part of this ridiculously out of touch ZIRP Insanity by the Federal Reserve.
And this is where you get so much insanity that you turn a conservative asset class like Treasuries into the biggest Financial Bubble in the History of mainstream asset classes. And the Fed thinks Exit Fees on Bond Funds is going to in any way mitigate the bursting of the Bond Market Bubble?