“Piece of news today that has been totally underreported, the vice chair of the Federal Reserve spoke, he said some things that I think if they’re repeated by Jay Powell tomorrow the DOW will be up 500 points. Write this down I’m saying this right now…”

Charles Payne

Making Money November 27, 2018

Yesterday I made the above observation, taking the final clue from the Fed Vice Chairman’s comments. 

The market enjoying a major relief, with investors diving into all sectors, but especially in those high-flying names that have been hammered.

The Federal Reserve

Jay Powell has delivered as I suspected he would, after listening to speeches from several other Fed officials, including those considered to be proxies for the Fed chairman.  With the release of the first ever Financial Stability Report and a speech at the Economic Club of New York.

Financial Stability Report

Vulnerabilities

1. Excessive leverage in financial system

Pressure can spark selling across all asset classes or a “fire sale” and amplify downturn.

1. Funding Risk

Rapidly withdrawn assets from a loss of faith in institutions or the system can trigger a “run” or general panic.

1. Excessive Debt

Trigger “boom and bust” patterns.

While household borrowing is at a low-to-moderate level relative to incomes, business-sector debt relative to GDP is historically high and there are signs of deteriorating credit standards.  Overall, vulnerabilities arising from total private-sector credit appear moderate.

Among businesses, debt levels are high, and there are signs of deteriorating credit standards. In addition, recently, debt has been growing fastest at firms with weaker earnings and higher leverage.

1. Valuations

Measured against historic benchmarks.  These benchmarks consider payoffs and economic conditions and while the Fed finds the word “bubbles” derogatory but acknowledges when they decline there is economic misery.

Cracks in Armor

The crack in the veneer of the US economic revival has been housing and this morning we learned it’s becoming more pronounced.  And I think the Fed is concerned about this, among other things.

October New Home sales came in at annualized growth rate of 544,000, well below Wall Street consensus of 575,000. 

More alarming developments.

• Median home price $309,700 down 3.1%, the lowest level since $298,000 in February 2017
• Months’ supply of 7.4 is the highest since February 2011