Fed flags high U.S. business debt, asset prices in financial report
“With financial volatility easing since
the end of last year, the Federal Reserve Board’s Financial Stability Report
suggests stretched asset valuations and risky corporate debt merit continued vigilance
against a backdrop of low-to- moderate vulnerabilities in the household and
banking sectors,” Brainard said in an emailed statement.
The ratio of debt to assets among publicly
traded, nonfinancial firms is near a 20-year high, the Fed noted, and the share
of new loans going to the most indebted companies is near peaks reached in 2014
and just before the 2007 to 2009 financial crisis.
While the Fed sees the system overall as
healthy, the levels of corporate debt stand out, said Fed Governor Lael Brainard.
“With financial volatility easing since
the end of last year, the Federal Reserve Board’s Financial Stability Report
suggests stretched asset valuations and risky corporate debt merit continued
vigilance against a backdrop of low-to- moderate vulnerabilities in the
household and banking sectors,” Brainard said in an emailed statement.
The Fed report is the central bank’s
latest take on a financial system that went full circle in a matter of months,
along the way prompting President Donald Trump to take aim at Fed policy and
demand lower interest rates. After stock markets hit record highs early last
fall, they plummeted by nearly 20 percent by year’s end, and investors began
demanding higher interest rates to hold the bonds of weaker corporations.
Now, stocks are back near their records
and by some measures prices are high, the Fed said - the expected future
price-to- earnings ratio for the S&P 500 is above its 30-year median,
though well below the levels hit during the 1990s tech bubble.
Corporate credit spreads have narrowed,
again focusing attention on whether investors, markets and households are
taking too muted a view of economic risks.
REASON FOR CAUTION
While not one of the Fed’s explicit
mandates, financial stability issues are weighed as part of its policy
discussions, and can shape the outcome. In the current environment, those
issues provide more reason for the Fed to discount calls from the White House
or elsewhere to cut rates, a step that could make riskier assets even more
attractive by reducing the returns offered by safer investments like U.S.
Treasury bonds.
As in the last edition of its now
twice-yearly report on the financial sector, the Fed cited the rapid growth of
business debt and leveraged lending to corporations as a source of possible
concern, noting that it could leave weaker companies stressed if the economy
softens. Business debt has grown faster than the overall economy for a decade,
the Fed noted, and “the elevated level of debt could leave the business sector
vulnerable to a downturn in economic activity or a tightening in financial
conditions.”
Overall debt however, including that of
households, has remained in line with the size of the economy.
Among the more immediate risks cited in
talks with outside contacts, the Fed noted, trade tensions and tariffs were the
“preeminent” potential problem, along with slowing growth globally, political
risks surrounding “Brexit,” and uncertainty around Fed policy as well.
Reporting by Howard Schneider; Editing by
Andrea Ricci
THE FACT THAT OVERALL DEBT IS IN LINE WITH THE SIZE OF THE ECONOMY MEANS IGNORE THE DOOMSAYERS WHO TELL US OUR HOUSEHOLD DEBT IS A TERRIBLE BURDEN TO BE CLEANED UP QUICK (PS YOU CAN'T)
IT IS TRUE BUT IT IS WHAT KEEPS CAPITALISM FUNCTIONING!!!
WHICH CAME FIRST DEBT OR CREDIT
DEBT OF COURSE
The
greatest irony for the austerity crowd who constantly call for cuts, cuts to
services and cuts to taxes is they like to blame debt (your mortgage) and deficits,
(credit card debt) for the need to give them tax breaks and cut public services
so they can be contracted out to these same privateers, as David Gabler showed
in his work 5000
years of debt
Credit
is the result of debt, debt begins with indentured servitude (not slavery) and
thus the need for credit. Capitalism:
in, with, for and by debt Capitalism, nature, socialism Anitra Nelson
Debt
is the bond market on Wall St. It is the bonds that make the real money not
stocks, the bonds are the debt the business owes to bond holders who no matter
what always get paid first, last and always. See the invaluable Wall Street. How it
works and for whom. Doug Henwood. Paperback originally published in 1998 by
verso (New. York & London). Published on the web
Workers
and their pensions are sacrificed but not bondholders. For they own the
company. As we have seen clearly repeated over and over again in Canada since
the Nortel debacle
Key dates in Nortel Networks' history
Allthat is solid melts into Air…..
Women work inside a Northern Electric Co. Ltd. (NORTEL)factory in Montreal, Que.
during the First World War. (Library and
Archives Canada/Canadian Press)
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