What we have been warning – and what people who can think for themselves clearly understand – is that the economy was destroyed by the COVID War lockdown, and it has been artificially pumped up with heavy doses of monetary methadone injected into the system by Washington and the Fed.
Now, finally, the U.S. Federal Reserve warned in its semiannual Financial Stability Report that risks to U.S. financial stability are on the rise, especially if interest rates rise and stock markets cool.
Yet, while reported in the business news for one day, it rapidly disappeared and never made it to the general public, which is still being swamped with COVID War “news.”
Federal Delusion
Overall, the country’s financial system appears sound according to the Fed. They claim that banks are well-capitalized, brokerage firms are not over-leveraged, household debt poses little risk, and low interest rates have made corporate debt loads manageable.
They also claim the system has remained stable even as money junkie gamblers have plowed hundreds of billions of speculative dollars into special purpose acquisition companies (SPACs), gobbled up cryptocurrencies that are backed by nothing but faith, and have valued stocks well above prices supported by earnings or assets.
“High asset prices in part reflect the continued low level of Treasury yields,” the Fed’s report said.
“However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields” and levels of risk-taking in investment markets have continued to rise in recent months, the Fed said.
“Should risk appetite decline from elevated levels, a broad range of asset prices could be vulnerable to large and sudden declines, which can lead to broader stress to the financial system,” the report warned.
Such a decline could be sparked by a resurgent COVID virus or a stalled economic recovery that stresses businesses and households, the Fed said.
“Perceived risks associated with the course of the pandemic and its effects on the U.S. and foreign economies remain relatively high,” the report noted.
“A worsening of the global pandemic could stress the financial system in emerging markets and some European countries,” it said.
At home, hedge funds are somewhat more highly leveraged than usual and often do not disclose the full measure of risk they take, the Fed pointed out.
Those traits and incautious investments by money market funds, open-end funds, and other non-bank financial actors pose particular threats to U.S. financial stability, the report noted several times.
The Fed singled out the number of initial public offerings run through special-purpose acquisition companies as an example of elevated risk.
“The appetite for risk has increased broadly” and “vulnerabilities associated with elevated risk appetite are rising, as the ‘meme stock’ episode demonstrated,” Fed governor Lael Brainard wrote in a separate statement referring to the GameStop fiasco.
“Valuations across a range of asset classes have continued to rise from levels that were elevated late last year,” she noted. “The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects” of a market correction or crash, she wrote.
Brainerd urged that banks be required to hold greater capital reserves during economic expansions to guard against the effects of downturns.
The recent failure of Archegos Capital Management to meet margin calls, causing several banks to post major losses, also was singled out by Brainerd, prompting her to call for hedge funds to report more “granular, high-frequency” data.
“While broader market spillovers appear limited, the episode highlights the potential for material distress at [non-bank financial institutions] to affect the broader financial system,” the Fed report added.
“A decline in asset prices, home prices, cryptocurrency would certainly hurt the people holding them,” former Fed governor Donald Kohn acknowledged to the Wall Street Journal. “But it’s not going to get amplified through a weakness in banks, the way it did in 2007 and 2008,” he said.
TREND FORECAST: Fed Fear is real. They know the risks, but as we analyze the data, they are downplaying the implications. For example, as for their statement that banks are well-capitalized, brokerage firms are not over-leveraged… bullshit has its own sound.
What will the banks do when the commercial real estate market plummets, and what will the brokerage firms do when the market crashes?
Again, minus a wild card, rising inflation will push the Fed to raise interest rates. When interest rates rise and the cheap monetary methadone they have been injecting into the system is too expensive for money junkies to borrow, the crashing Wall Street will ravage Main Street.
