“Waiting too long before raising interest rates would not be wise.” So said Janet Yellen, head of the Fed, in plain terms during the hearings held in recent days in the US Congress. Wolf Richter, of the website Wolfstreet.com, points out that the phrase “waiting too long” is increasingly present in the speeches that various Federal Reserve officials have been giving for several weeks.
The suspicion is that the Fed knows something that we do not know, or do not know as well as we should. There are in fact signals in US markets that bear a frightening resemblance to those that preceded the outbreak of the 2008 financial crisis.
Signs of a bubble affecting CRE (commercial real estate) assets, that is, the commercial real estate market and, as a consequence, the various loans to entities such as funds, companies and developers that US banks have extended to finance the construction of shops, shopping centres, hotels and office buildings.
These loans have a strong impact on the economy, considering that they are worth almost $2 trillion, $2,000 billion, and that they are secured, as in the case of residential mortgages, by real estate, in this case for commercial use.
The point is that the prices of such properties have risen in recent years to alarming levels, so much so that a market crash is now feared. Which, besides being a real estate crash, would knock out the giants of finance themselves.
The toxic bomb threatening the US is in fact worth $2 trillion and risks exploding at any moment. The Fed makes no secret of its fears, so much so that in the report delivered to the US Congress the institution addressed the issue directly, even though the acronym CRE was not pronounced directly by Yellen during her hearings.
The not insignificant detail is that this is not the first time this category of loans has been mentioned in the reports that the Fed delivers to Congress twice a year: it is the fifth time. And already in a report two years ago the institution had spoken of “pressures on valuations” in CRE. Since then, warnings have appeared in every analysis, including the one released in June 2016, in which the Fed wrote that valuations in the commercial real estate market were becoming increasingly vulnerable to negative shocks.
Even earlier, in November 2015, Eric Rosengren, president of the Boston Fed, had raised more than a few doubts about the toxic price boom in Boston.
A déjà vu, certainly: the issue is the same as in 2008, since these loans have also been the subject of securitisation transactions. Transactions that gave rise to the “Commercial Mortgage Backed Securities” market, that is, securities backed by loans on commercial real estate: CMBS (Commercial Mortgage-Backed Securities), which now risk becoming the new nightmare of the banks and the Fed.
How well founded is this fear? To find out, one need only look at the trend of the Green Street Commercial Property Price Index, which shows that commercial property prices in the US fell by almost 40% during the Great Recession, and then more than doubled.
This is what the Fed’s latest report says:
“CRE valuations, a source of growing concern over the past year, have risen further.” The debt that has fuelled this boom has jumped to $1.98 trillion, 14% higher than the peak of the previous bubble in the years of the last financial crisis that brought the whole world to its knees.
In all this, it is worth highlighting the higher-risk context in which banks could operate if the Dodd-Frank legislation enacted immediately after the 2008 financial crisis were to be scuttled by Trump.
Janet Yellen & Company are currently trying not to fuel panic in the markets, and in the report they state that “a significant decline” in commercial real estate prices could weigh on “smaller banks”. However, it is precisely the smaller banks that risk bringing down the financial system, since they are exposed to such debt to the tune of $1.22 trillion.
Source:
http://www.wallstreetitalia.com/la-fed-trema-di-nuovo-boom-tossico-asset-bolla-da-2-trilioni/
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