A warning sign of a bubble? stock issuance

 

One of the key signs of a stock bubble is the issuance of new stock. Simply put, when the stock market is overvalued, smart firms will issue new stock to take advantage of these high values. The increase in supply will flood the market and generate downward pressure on stocks. We are seeing more issuance in the market this year, but it is not at extreme levels. The large increases in 2020-2021 were associated with SPACs, which cratered the following year. 

On the other hand, stock buybacks will occur when the stock market looks cheap, and CFOs want to increase their companies' stock prices. We are still seeing the numbers increase, although at a slower pace. 

What is important, and what we have not done here, is to adjust buybacks and issuance to the total stock market valuation, which may provide a better relative measure. In that case, buybacks may not seem as excessive, nor does issuance seem to be exceptional. There are still mixed signals on these CFO signals of overvalued stocks.

Say yes to corporate transparency

The SEC proposed that firms would only have to provide information on a semiannual basis. Yes, it is a burden on companies to provide quarterly reports, but what makes US markets so liquid and effective for all investors is that corporate information is readily available. Now, there may be some companies that pause about going public because of SEC regulations, but the solution is not to cut the amount of information provided to investors. Could there be a tightening of rules on what information is made available? Yes, this may be helpful, but cutting out core information by half is not the solution.

Goldman Sachs, based on survey data, found that almost 100% of respondents oppose the move to semi-annual reporting. The four leading reasons include transparency, timeliness, and protection. Do not change what most seem to believe is not broken. What are the people at the SEC thinking?

Warsh and the star-studded task forces

 

Chairman Warsh has announced the members of his task forces for review of Fed policies. I am impressed by the choices and the seriousness with which you are trying to provide fresh perspectives on some key problems. This is not an internal review but includes both business and academic thinkers with key knowledge for each task. I am thinking this may be one of the most extensive and far-reaching reviews ever attempted by the Fed. 

Task Force	Objective / Focus Area	Members (Co-Leaders)
Communications	Reviewing how the Federal Reserve conveys policy deliberations, decisions, forward guidance, and economic projections.	* Peter R. Fisher (Professor of Practice, Foster School of Business, University of Washington)* Arminio Fraga (Founder/Chairman, Gávea Investimentos; former President, Central Bank of Brazil)* Mervyn King (Former Governor, Bank of England)
Balance Sheet Policy	Examining the costs, benefits, and institutional implications of the Fed’s balance sheet regime.	* Karen Dynan (Professor of Economics, Harvard University)* Raghuram Rajan (Professor of Finance, University of Chicago Booth; former Governor, Reserve Bank of India)* Jeremy Stein (Professor of Economics, Harvard University; former Federal Reserve Governor)
Data	Improving the quality, speed, and timeliness of real economic signals to inform monetary policy decisions.	* Raj Chetty (Professor of Economics, Harvard University)* Doug McMillon (Former President and CEO, Walmart Inc.)* Kevin Murphy (Professor of Economics, University of Chicago)
Productivity and Jobs	Assessing the economic impact of general-purpose technologies, particularly artificial intelligence (AI), on labor and productivity.	* Marc Andreessen (Cofounder and General Partner, Andreessen Horowitz)* Charles I. Jones (Professor of Economics, Stanford University / Anthropic)* Asha Sharma (Executive Vice President & Xbox CEO, Microsoft Corp.)
Inflation Frameworks	Evaluating the effectiveness and design of the Federal Reserve’s framework for price stability and inflation targeting.	* Greg Mankiw (Professor of Economics, Harvard University; former Chair, Council of Economic Advisers)* Thomas Sargent (Professor of Economics, NYU; Nobel Laureate)* William White (Senior Fellow, C.D. Howe Institute; former Economic Adviser, BIS)

Warsh and forward guidance - NOT

 

What is clear from the first Warsh press conference is that he will not provide forward guidance on the Fed’s actions. Chairman Warsh is not going to tell the market anything about what the Fed may be doing in the immediate future.

Governor Waller, on the other hand, provided a spirited defense of forward guidance that serves a specific purpose, albeit flexible to meet policy needs. Perhaps forward guidance was useful when we were close to the zero bound, and the Fed wanted markets to know that rates would be lower for longer. It may not be appropriate today, given that we are in a different regime.

Nevertheless, forward guidance is supposed to signal policy to the makrets os they will bend to the desires of the Fed. If the Fed is unsure which direction to take, any forward guidance may be wrong-footed. 

In any case, less forward guidance should lead to more bond market volatility and more discussion on what the Fed is thinking. Fed watch is back in vogue.