
Yellen cites 'potential dangers' in U.S. stock valuations - claywm
http://www.reuters.com/article/2015/05/06/us-usa-fed-yellen-idUSKBN0NR1JI20150506
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kolbe
Back when the Fed started its first QE program, I thought it was a pretty
risky bet. I felt that all QEs have gone far beyond providing emergency
liquidity, and instead conceded that asset prices were/are unsustainably high.
But one thing that would bail out an overpriced market for assets was to have
a domestic economic revolution that rivaled WW2 rebuilding or the tech
revolution. So, their reaction was to actually continue to prop up asset
prices. Forget the Taylor Rule and whatever. The Fed wanted to give asset
prices a floor. By attempting to give asset prices a floor, it was simply
buying us time to have a solid economic revival that goes beyond juicing GDP
with credit and entitlements.

That was over five years ago. We chose to invest this capital in three routes.
One is domestic oil production. It may be a little early to tell, but it looks
like all that money will have been wasted. So, net effect on the economy may
end up being that we wasted time, money and natural resources in building
useless machines in the middle of nowhere that added an unfathomable amount of
carbon to our atmosphere. The other is Silicon Valley tech and biotech. So
far, that has not been a bust, but I'm not sure it's playing out quite as well
as we need it to. SV has a strange dynamic where the efficiencies and labor
displacements that it has been bringing about may actually be harming our
economy. Biotech sounds cool, but it may just be a new rent seeking industry
that sucks off the teat of inefficiencies of socialized medicine.

Needless to say, I don't think any of these industries are anywhere near the
level of revolution they need to be to actually justify asset price levels.
They can be good, but I doubt that good.

So, regarding 'potential dangers' in asset price overvaluations. Umm, no shit?

~~~
protomyth
"One is domestic oil production. It may be a little early to tell, but it
looks like all that money will have been wasted. So, net effect on the economy
may end up being that we wasted time, money and natural resources in building
useless machines in the middle of nowhere that added an unfathomable amount of
carbon to our atmosphere."

How is the money wasted given the large production and downward price pressure
on energy? This shift in price of gas at the pump has done quite a lot for the
working poor in terms of cash on hand.

Also, "middle of nowhere" as a description is a bit insulting and I don't
think most people in a city would like to have oil wells next door. Some
things happen away from the coasts.

~~~
throwaway9011
We are mixing up a few things here.

1) Has the oil boom benefited anybody? Yes it has.

2) Has the oil boom benefited morally/politically sympathetic groups, such as
the American poor? Yes it has.

3) Will the oil boom benefit humanity as a whole, over the medium to long
term? The jury is still out on this one, and the answer may in fact be no.

It is perfectly possible to do things that are beneficial in the short run but
ruinous in the long run.

~~~
cryoshon
Excellent points. Your comment does a great job of parsing the topics at hand
while correctly identifying the core problems.

Numbers 1 and 2 are pretty easy to see, because they've already happened.
Number 3 is where you will face stiff resistance from capitalists because of
their insistence bought via fake science that climate change isn't real or the
consequences of fossil fuel use are ambiguous.

------
kyledrake
Chart one, DJIA, 1982 to 2014:
[http://i.imgur.com/29GT453.png](http://i.imgur.com/29GT453.png)

Note that it's even higher now on the end of that chart, so push it to 18,000
and you've got the comparison.

That chart, at a bare minimum, whether you think we're dealing with
"irrational exuberance" or not, should tell you that we're in an exceptional
period in the stock market.

Chart two, federal funds rate, 1954 through 2009:
[http://upload.wikimedia.org/wikipedia/commons/thumb/3/31/Fed...](http://upload.wikimedia.org/wikipedia/commons/thumb/3/31/Federal_Funds_Rate_1954_thru_2009_effective.svg/640px-
Federal_Funds_Rate_1954_thru_2009_effective.svg.png)

That funds rate is still that low. Whether you think it's too low or not, it's
pretty obvious that this is an exceptional period for access to low-interest
money.

I'm watching the real estate market spike up much faster than wages (again),
and billions get poured into tech companies who's business model really just
isn't there and/or heavily depends on advertising (advertising rates collapsed
after 2000, by a lot). I was worried about the valuations a year ago, and now
they're even higher. And of course, it's pushing a lot of private valuations
up too. The more money publicly traded corporations have, the better your
chances of selling a private company at a high value, or going public without
good fundamentals.

I think there's just too much money sloshing around right now. Excess money
doesn't go into CPI anymore, it more often creates valuation fevers. I don't
think the overnight rates should have been this low for so long. And I'm
pretty worried about what's going to happen when they finally start raising
them, but not as worried as what happens if they continue to leave them as-is.

~~~
EliRivers
Chart one, DJIA, adjusted for inflation:

[http://home.earthlink.net/~intelligentbear/dj-lt-
infl.gif](http://home.earthlink.net/~intelligentbear/dj-lt-infl.gif)

When you take inflation into account, it doesn't look nearly so interesting.

~~~
Pxtl
Much better. Also logarithmic, which was another failing of the above graph.
With a line of best fit!

Yes, if the market is overinflated, it's because growth itself has failed to
happen.

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cdnsteve
“What is needed is a culture that induces bankers to do the right thing even
if nobody is watching,” Lagarde said in her prepared remarks.

Do bankers now get paid for doing the right thing? Because if they don't, it's
not going to happen.

~~~
adaml_623
It would be a good intermediate step to define 'the right thing'.

And then to pay them for doing the right thing.

~~~
toomuchtodo
Or perhaps put a framework into place that prevents them from doing anything
other than the right thing?

~~~
saryant
But what _is_ the right thing?

Fannie and Freddie shoved mortgages through the pipeline to both increase
their profits and fulfill their stated goal of increasing American home
ownership. The latter is what most considered to be "the right thing"
including their regulators.

But then the law of unintended consequences reared its ugly head, housing
prices started to fall and we all realized how tied together that
securitization pipeline had become. Investors bought credit swaps on their
mortgage bonds to protect their downside and move the assets off their balance
sheets in order to buy more mortgage bonds—also allowing retail banks to
create more mortgages, further increasing home ownership. The companies who
sold those swaps (AIG) assumed that housing prices would never fall and
default rates would never rise.

They were wrong.

As soon as that black swan event happened and Bear, Lehman et al had to start
marking losses on those MBS products, the market pounced. Then AIG had to
start paying those swaps but couldn't (hence the nationalization).

While there were definitely bad actors (those handing out liar loans and so
forth), at any individual stage in that massive, trillion-dollar pipeline,
most actors were behaving in a way that rationally made sense. Banks sought to
hedge their downside by buying CDSs against their MBS products. Insurers
trusted the ratings agencies. The ratings agencies were too weak to do
anything despite internal misgivings about those MBS products (and of course
the incentive structure there is all sorts of stupid). The investment banks
definitely twisted arms at the ratings agencies to get investment-grade
ratings on what were truly junk bonds and that was bad on their part and
arguably fraud, so yes, someone should probably be liable for that.

But what could've been done differently at the macro level to ensure that
every actor in that pipeline acted in the interest of the "greater good" when
we can't even define what that is? Yes, we could have tighter controls on
mortgage underwriting standards but will that prevent the next crash? How do
we hold someone liable for not avoiding a crash? We can't even tell when a
crash is coming, are we honestly going to blame someone for not being able to
do the impossible?

~~~
toomuchtodo
I've bookmarked this to come back and respond. My father was a mortgage
underwriter who attempted to blow the whistle at a major lender (to no avail).
I'm very familiar with the various complications faced in properly regulating
the MBS marketplace.

~~~
saryant
Plenty of people tried to blow the whistle. The SEC and Fed were warned but
were unable to comprehend the overarching microeconomic problems brewing
within each firm.

And that doesn't change the overarching problem of defining the _right_ thing
at every level. Was AIG acting unethically by failing to properly assess the
risk of their CDSs? Or were they just incompetent?

------
dataker
The irony here is that Yellen is the chair of the Federal Reserve.

It's analogous to Malboro's CEO warning smokers about lung cancer.

~~~
jpmattia
Yes, I'm surprised that didn't make bigger headlines.

"Hoocoodanode that our easy monetary policy would have inflated stock
prices?!"

------
fredkbloggs
If an arsonist burned down every forest in North America, then had the stones
to give interviews in which he complained about air pollution, we'd properly
call him a dangerous nut and lock him up for life.

Apparently if you're an economist and you do the same thing, you are instead
given the world's most powerful job.

------
pa5tabear
Time to rebalance into bonds?

~~~
volkadav
Some people (e.g. Bill Gross) think there's a bond bubble too. As bond prices
and interest rates are inversely correlated, and it's hard for rates to go
anywhere but up at the moment, imho they're probably right. I don't think
anyone has a good handle on what asset classes are particularly safe (or,
equivalently, will yield reasonable returns over the near-intermediate term)
at the moment. My best guess is that P/E ratios are still fairly sane-ish, so
my investments are in stocks atm. YMMV, I am not an investment adviser, etc.

~~~
AnimalMuppet
A bubble? No. A bubble is more than just "asset prices are higher than they
should be".

Take stocks or real estate. The price goes up. People see the price going up.
They buy, because they want to buy something where the price is going up so
that they will make money. That buying increases demand without increasing
supply, so the price goes up some more. _That 's_ a bubble - where the price
goes up because people are buying because the price is going up (and so they
think it's going to keep going up). It's a positive feedback loop.

But bonds... nobody's buying bonds because they think the price is going to go
up. They're buying bonds because they think bonds are safe. But, in fact,
bonds aren't very safe. The next direction interest rates will move is up;
when they do, bond prices will fall. The longer term the bonds, the more the
price will fall.

Note well: I am not an economist. I am not an investment advisor. This is my
understanding of how things work, but it is not financial advice.

