08/05/17

Don't Show Jim Bullard This Chart [feedly]



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Don't Show Jim Bullard This Chart
// Zero Hedge

During last year's Jackson Hole meeting, in a rare moment of truth St. Louis Fed president James Bullard discussed "asset bubbles" with CNBC's Steve Liesman, and said that "the Fed model has nothing about asset price bubbles, most models don't have anything about that", and as a result no Fed model ever forecasts asset bubbles, which incidentally explains why the traditional side-effect of Fed policy over the past decade has been, drumroll, asset bubbles.

Then, when Liesman continues to press, Bullard said that any opinion on the issue one "has to make a judgment." So when asked "what is your judgment" on asset bubbles, Bullard replied "I think we are on the high side of fairly valued, I could see the process getting away from us, maybe tech stocks, maybe others."

Fast forward to today when Bullard reiterated his warning when in a presentation titled "An Illustrative Calculation of r-star", Bullard made the following observation on asset values:

  • FED'S BULLARD: EQUITY VALUATIONS ON THE "HIGH SIDE" OF HISTORICAL EXPERIENCE, BUT DOES NOT SEE SYSTEMIC RISK IN THE ECONOMY

We assume that Bullard was considering the infamous Shiller Cape chart, which shows that S&P multiples are now at 30x, a level it has reached on just a fraction of occasions in the past. The reason for that "high" valuation is simple: the Fed and other central banks, which as we showed over the weekend, are injecting a record amount of liquidity in the market, which problematically is no longer enough. That said, if Bullard wants to see systemic risk, maybe he should take a look at this chart.

Bullard also had some good news.

  • FED'S BULLARD: EQUITY VALUATIONS HIGH BUT NOTHING LIKE HOUSING BUBBLE

He's right: on a Price-to-Sales ratio, current equity valuations are much higher than the housing bubble, and are rapidly approaching the dot com bubble's all time highs.


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