Anyone Who Says The Market Is Just Being Driven By The Fed Is Insane
REUTERS/Greg Baker "I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low," said Federal Reserve Chairman Ben Bernanke in his semi-annual testimony on monetary policy before the House Financial Services Committee this month. "If we were to tighten policy, the economy would tank."
Deutsche Bank economists Peter Hooper, Torsten Slok, and Matthew Luzzetti take issue with that claim in a new report:
Often we meet we meet investors investors who argue along these lines:
"The only reason why markets are rallying is because the Fed is printing money, and once the Fed stops printing money, financial markets will crash like a house of cards."
This is a complete misunderstanding of what is going on.
What many investors forget is that we have over the past five years witnessed a dramatic improvement in the housing market, consumer balance sheets, and banking sector balance sheets. This healing and correction of imbalances has come so far that the economy is now able to stand on its own legs and generate sustainable growth going forward. This is exactly the backdrop for why tapering can begin soon and the Fed can eventually begin hiking rates.
Hooper, Slok, and Luzzetti use the following series of charts to show how imbalances leading to the 2008 financial crisis have slowly been corrected in the past few years.
"The indicators in this chart book show that the correction of these imbalances was fastest in housing y g, followed by banking, consumers, and the labor market," says the Deutsche Bank team. "The slower healing in the labor market is obviously important for when the Fed will hike rates but a virtuous cycle is currently playing out with higher home prices virtuous cycle is currently playing out with higher home prices supporting consumers and banks, which again supports the housing market, and this virtuous cycle will continue to support employment growth going forward."
Let's go to the charts.
New and existing home sales are rising.
Deutsche Bank, Business Insider, data from Bloomberg
Meanwhile, foreclosures are on the wane.
Deutsche Bank, Business Insider, data from Bloomberg
House prices are going up.
Deutsche Bank, Business Insider, data from Bloomberg
And household net worth is at an all-time high.
Deutsche Bank, Business Insider, data from Bloomberg
Meanwhile, total debt is falling.
FRBNY Consumer Credit Panel/Equifax
As are new delinquent loan balances.
FRBNY Consumer Credit Panel/Equifax
The percentage of loans that are current, on the other hand, is increasing.
FRBNY Consumer Credit Panel/Equifax
Foreclosures and bankruptcies are declining.
FRBNY Consumer Credit Panel/Equifax
And households' ratio of debt service payments to personal income has plummeted.
Deutsche Bank, Business Insider, data from Bloomberg
Credit card balances are growing at a slower pace than in the pre-crisis period.
Deutsche Bank, Business Insider, data from Bloomberg
And credit card delinquencies are down dramatically.
Deutsche Bank, Business Insider, data from Bloomberg
Bank balance sheets have been restored.
Deutsche Bank, Business Insider, data from Bloomberg
Loan loss provisioning has returned to near 2006 levels.
Deutsche Bank, Business Insider, data from Bloomberg
And net interest margins are at the same levels today as they were in 2007.
Deutsche Bank, Business Insider, data from Bloomberg
Risk-weighted assets as a percentage of total assets are at the lowest levels in decades.
Deutsche Bank, Business Insider, data from Bloomberg
The percentage of construction and development loans that are noncurrent have fallen drastically.
Deutsche Bank, Business Insider, data from Bloomberg
And demand for commercial and industrial loans continues to strengthen.
Deutsche Bank, Business Insider, data from Bloomberg
Banks are more willing to make consumer loans as well.
Deutsche Bank, Business Insider, data from Bloomberg
The labor market is improving, especially in the all-important services sector.
Deutsche Bank, Business Insider, data from Bloomberg
Real estate and construction, two of the industries where the last crisis was centered, are recovering.
Deutsche Bank, Business Insider, data from Bloomberg
Job openings are on the rise as well.
Deutsche Bank, Business Insider, data from Bloomberg