Home Morning Commentary Morning Commentary – Warnings

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There has always been a group of people who are fearful of a market getting “too hot.”  Some people just want to make a fearful warning in order to gain credibility and fame, in order to sell books in the future.  Most, however, never offer a warning of any kind – especially major Wall Street banks…and central bankers.  What’s rather odd, is that these two sectors of The Street did indeed offer a fresh warning that the markets are too high.

J.P. Morgan’s analyst, Jan Loeys, recently wrote a note to clients titled “Financial Overheating a Problem Yet?”

“The speed of these upgrades and asset price rallies is both exhilarating and scary. The faster we rally, the greater the joy, but the more one should be worried about the eventual reckoning. How far from now is that and what should we do about it?

“We stay in the Growth Trade as we believe that the steady upgrading of growth prospects and asset price moves is still benefiting from greater positive feedback loops and that the negative feedback from economic and financial overheating are both still too weak or too far off. At the same time, the speed of the rally is inducing us to start trimming slowly, through going neutral on HY.”

“The signs of financial overheating in the US can be seen from elevated equity multiples, which for the S&P500 reached 24 on a trailing reported GAAP basis, the same as in 1997; new cycle lows on HG spreads and lower than the last cycle lows when adjusted for maturity and ratings changes; HY yields below 6%, which cannot be called high yield anymore; US Households with a higher share of equities in their financial assets than anytime except 1999-2000; and US household confidence back to the highs of the 90s, and their unemployment rate back to the lows then.

What’s even more interesting is that the governor of the People’s Bank of China (PBoC) made a similar warning, yet they are the very people blowing financial bubbles!

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.

“The nation should toughen regulation and let markets serve the real economy better, according to Zhou.

“High leverage is the ultimate origin of macro financial vulnerability,” wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure.

“In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”

And yet, when there is a slightest hint of the stock market falling; what do the central bankers do?  They create even more excessive debt to expand credit even faster.  Nevertheless, it is interesting to hear an actual central banker complain about the outcomes of their own meddling in the markets.  

What will come of it?  Probably nothing.

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