Dressed For Bubbles

There Could be Some Bubble Risk Somewhere … Maybe …

Ms. Yellen has inter alia shared her insights about financial markets with the Senate Banking Committee – while wearing her bubbly dress, no less!  According to her, there may be a “risk of bubbles” in leveraged loans and low grade debt – to which we say, it is way too late to worry about whether there “may” be such a risk. That horse has left the barn long ago. We have the biggest bubble in low grade debt ever, and central banks are 100% responsible for it.

Interestingly, she thinks that stocks at the third highest CAPE in all of history are just fine, valuation-wise (CAPE or Shiller P/E at 25,5 currently, approximately at the 92nd percentile of the 1602 data points in this series according to Doug Short). Note here that there are some measures by which stocks are actually valued at the second highest level since the 2000 mania peak (e.g. price/revenues).

Our guess? She is probably consulting the long-discredited “Fed model” when she is trying to divine whether stocks are overvalued. 

Bloomberg reports:

“ Federal Reserve Chair Janet Yellen warned she sees signs of asset price bubbles forming in some markets such as those for leveraged loans and lower-rated corporate debt, while indicating stocks aren’t overvalued.

“We’re seeing a deterioration in lending standards, and we are attentive to risks that can develop in this environment” of low interest rates, Yellen said today in semi-annual testimony to the Senate Banking Committee.

With stocks hovering near record highs, Yellen signaled she isn’t worried about frothy markets broadly, saying in prepared remarks that equities, real estate and corporate bond values are in line with historical norms. The Fed needs to hold its benchmark policy rate near zero, where it’s been since December 2008, until the labor market improves and inflation accelerates, she reiterated.”