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Fed Report Says Rising Asset Prices Pose Threat To Markets
The Federal Reserve’s Financial Stability Report said that the financial system remains stable overall. This is the assessment despite the dangers presented by the ongoing COVID-19 pandemic.
However, there are future dangers on the rise. In particular, investors should heed signs if the current bull run in the stock market tails off.
RELATED: Ron Paul: This Is The Biggest Financial Bubble In History
Free-for-all In The Market Right Now
Investors remained voracious as they snapped up equities, corporate bonds, and cryptocurrencies. Billions are pouring into blank check Special Purpose Acquisition Companies (SPACs).
Meanwhile, the market remains brisk for traditional initial public offerings. In short, asset prices like stocks are rising to alarmingly high levels. These could set investors up for big losses from sudden declines.
The Fed report released Thursday noted that stocks and other risky assets have risen in value since last November. In some cases, they reached record highs.
The outlook for the post-pandemic U.S. economy continued to rise as vaccinations increase and businesses reopen. Asked whether rising prices should remain a concern, Chairman Jerome Powell said yes. As long as interest rates stay low, valuations remain justified.
However, the Fed report reminds the public that dangers are present. This is especially true if the market suddenly changes its mood. “High asset prices in part reflect the continued low level of Treasury yields. However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields. In this setting, asset prices may be vulnerable to significant declines should risk appetite fall,” the report stated.
Banks Should Increase Capital Requirements
In an accompanying statement, Fed Governor Lael Brainard said the situation bears watching. Also, Brainard emphasized the need for the system to have proper safeguards.
Specifically, she mentioned that banks should increase their capital requirements during economic expansions as a buffer against downturns. In addition, the report also mentions risk at hedge funds and other nonbank financial institutions as potential threats to the system.
“Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year.
The combination of stretched valuations with very high levels of corporate indebtedness bears watching because of the potential to amplify the effects of a re-pricing event,” Brainard added.
Vulnerable Sectors
The Fed report also notes the particular sectors with high vulnerabilities. These include energy, travel, and hospitality. These sectors are particularly at risk due to their sensitivity to the pandemic. In addition, the Fed also mentioned potential threats from the money market and open-end funds.
Foremost among the Fed’s examples was Archegos Capital Management. Big banks who backed the investment firm took big losses once Archegos failed to meet margin calls. “While broader market spillovers appeared limited, the episode highlights the potential for material distress at [nonbank financial institutions] to affect the broader financial system,” the report said.
Student Loans Offer Limited Risks
Overall, the Fed assured the public the system remains sound. Household balance sheets remain in good shape. Meanwhile, corporations remain buoyed by a rising economy and low interest rate. In fact, even the $1.7 trillion in student loans pose “limited” risks to the economy. Most education debt is in the hands of 40% of the country’s top earners.
A survey conducted by the Fed reported that the biggest worry remains virus-related. In particular, vaccine-resistant variants pose the biggest threat to the market.
Next in the list of concerns is a potentially sharp increase in interest rates. The third is a surge in inflation, while tensions between the US and China round out the fourth.
Watch Arirang News as they report that the Federal Reserve warns over the risk of “significant declines” in asset prices as valuations climb:
Loading ...Do you agree with the Fed Report that rising asset prices are stretching valuations and creating risks? Are stocks and other asset prices getting unsustainable?
Let us know what you think. Share your thoughts on the current market in the comment section below.
5 Comments
We are headed for a huge brick wall and this economy will fall into a million pieces once we hit it at full speed! Oh but don’t you worry!! Biden will be there to pay us all “Free money” while those printing presses continuously make more funny money bills,……..right up until China cuts the power to the press and some finally realize that we are at the bottom and in a world of sh!t!!
I’m a Realtor and was around when the bubble happened. With over 5 million households in “forbearance”…someone has to pay the piper eventually. Due to Covid” Mom & Pop rentals are suffering because many people are abusing the system and the government has not been taking care of the Owners of rentals. Those renters who get assistance with rent are not all paying the rent. This is a burden on tax payers. Recent DC Judge ruled the Eviction ban as illegal…but of course the DOJ is appealing. They need to concentrate on making sure those getting assistance pay the landlords. All this plus the cost construction materials have increased 3 fold and supplies delays due to not enough workers and China trade war are creating a perfect storm. I’d like to think the Biden Administration is just “incompetent” but I think they know exactly what they are doing….running the USA into the ground so they can grab land and assets and redistribute the wealth. They are going straight past socialism nd right to communism.
@RENEE B You are so absolutely correct in everything you just said! The market will only take so much with idiots in the Whitehouse! I think you call that socialism along with a hint of communism! A recipe for diaster!!!!
I just wish both sides of the isle would put a line item plan together of how america should be in all categories.Not trick hard to under stand .Simple .but straight to the point .Like .Education should be free grade 1 thru 12 (yes) (no) .And for those that dont know how to answer any questions above their knowledge .Skip it .take a survey and lets really see what needs to be changed and what doesn’t ? I know this would be Hugh and makes ones brain cramp . But if one cannot do this .well maybe they need a controlling government.But I believe our for fathers all ready ran from and created America the free ..Which if you dont know what documents they put in place for this land of the free .You must have not been paying attention in class . Or your school was who taught you not to like this freedom you have enjoyed . How about leaving everything in place no new laws .no changes until its people understand what direction we are trying to change it into . So .Leave everything alone ! We change things before the ink is even dry these days .Whats the rush ! Stop creating problems that make us push laws into place that its quite obvious we haven’t done our home work on which is again going to create more problems .This is why we have thousands at our boarders .that are suffering because of knee jerk promises.with out a plan ..
Joe Biden and the Democrats want to implement the New World Order. For this to happen they must get people dependent on the government, break the country, do away with small businesses in order for this to happen. That is why big tech has invested so much into politics to rig the last election. If you want to know what will happen, read the book of Revelation. America will never be the same. We are headed for big trouble.