S&P 500 (^GSPC)

Stop me if you've already read the Fed's Financial Stability Report Nov 2021. They appear rather concerned with: pricey equites, too much business and consumer debt, too much banking leverage, and--GET THIS-->a run on banks by investors (see no. 4) due to fear of financial illiquidity. Clearly they are concerned. The link to the report is at the bottom of the page. Cheers.

"1. Elevated valuation pressures are signaled by asset prices that are high relative to eco-
nomic fundamentals or historical norms and are often driven by an increased willingness
of investors to take on risk. As such, elevated valuation pressures imply a greater possibil-
ity of outsized drops in asset prices.

2. Excessive borrowing by businesses and households leaves them vulnerable to distress
if their incomes decline or the assets they own fall in value. In the event of such shocks,
businesses and households with high debt burdens may need to cut back spending
sharply, affecting the overall level of economic activity. Moreover, when businesses and
households cannot make payments on their loans, financial institutions and investors
incur losses.

3. Excessive leverage within the financial sector increases the risk that financial institu-
tions will not have the ability to absorb even modest losses when hit by adverse shocks.
In those situations, institutions will be forced to cut back lending, sell their assets, or, in
extreme cases, shut down. Such responses can substantially impair credit access for house-
holds and businesses.

4. Funding risks expose the financial system to the possibility that investors will “run” by
withdrawing their funds from a particular institution or sector. Many financial institu-
tions raise funds from the public with a commitment to return their investors’ money on
short notice, but those institutions then invest much of the funds in illiquid assets that are hard to sell quickly or in assets that have a long maturity. This liquidity and maturity
transformation can create an incentive for investors to withdraw funds quickly in adverse
situations. Facing a run, financial institutions may need to sell assets quickly at “fire
sale” prices, thereby incurring substantial losses and potentially even becoming insolvent.
Historians and economists often refer to widespread investor runs as “financial panics."--https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf

In September Powell and Wall St. pundits did not see any serious risk of contagion from China's housing sector (bond collapse). This month, however, it seems the fed has changed it's view. Their semi-annual report on Monday included China's Evergrande risks to American financial stability: "“Given the size of China’s economy and financial system, as well as its extensive trade links with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global growth, and affect the United States"

Chinese banks hold 51.4 trillion yuan ($8 trillion) of outstanding loans to the real estate sector and, according to Bloomberg,"41% of China’s banking system assets were either directly or indirectly associated with the property sector at the end of last year." Then factor in that the Chinese housing sector accounts for about 30% of Chinese GDP. Evergrande is just the poster child for a much larger situation of illiquidity.

Interesting that global stock funds saw money flowing out by $24 billion while US stock funds saw money coming in at a rate of $8 billion a week in October. Does that tell us the rest of the world is more concerned than we are? Or, is it something as simple as year-end deposits in America squaring retirement accounts? And, with an $8.5 trillion balance sheet, the Fed will tighten $15 billion a month, a mere 17 basis points or .17% which is overshadowing everything else by its size. With all these big numbers bouncing around, it may explain the steadiness of the US bond market…up until now.