Its Bubble Time – Is your Retirement Protected against the coming burst and correction? Dow Posts Year’s 15th Record High of the year!

Its Bubble Time – Is your Retirement Protected against the coming burst and correction?

Dow Posts Year’s 15th Record High of the year

Global Banking Group Warns of Market Correction Ahead


Stocks climbed on Wednesday, lifting the Dow to its 15th record high of the year, on corporate earnings, deals and better-than-expected growth in China.The Dow Jones Industrial Average closed unofficially 77 points higher at 17,138.20. The S&P 500 rose 8 points and the Nasdaq added 9 points. Equities maintained near session highs with the release of the Federal Reserve’s Beige Book, which found the economy expanding at a modest to moderate pace, with consumer spending up in all of of the Fed’s districts. Earnings Scout. Shares of Time Warner rose 17 percent after the owner of CNN said it rejected an $80 billion takeover bid from Rupert Murdoch’s 21st Century Fox.Technology shares rallied in the wake of earnings from Intel with the chip maker forecasting third-quarter revenue above Wall Street’s estimates. Earlier, China reported second-quarter economic growth of 7.5 percent, above expectations.


Global Banking Group Warns of Market Correction Ahead

Uncertainty breeds volatility. That’s why even though volatility levels are near record lows, the Institute of International Finance sees choppy markets ahead.

Investors have been willing to take on more risk, pushing borrowing costs down and buoying stock values, amid strengthening confidence in the U.S. and global recoveries. But with perhaps too much exuberance, says IIF Executive Managing Director Hung Tran.

Investors don’t seem to be taking adequate account of the uncertainties around economic growth and monetary policy, he says. And that points to a pull-back in markets.

“With uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation,” IIF’s top economists said in the group’s latest Capital Markets Monitor. (The IIF represents nearly 500 of the world’s largest private banks, insurers and other financial institutions.)

The IIF’s concerns echo those of some Federal Reserve officials, who said at their June meeting that low volatility levels and increased risk-taking signaled “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” according to minutes of that meeting.

The IIF said corporate bonds are particularly at risk as firms have bulked up on debt, pointing to global high-yield issuance hitting a record high $135 billion in the second quarter of the year.

There are three sources of uncertainty facing the Fed, according to Mr. Tran.

The first is how to interpret upcoming employment data. While unemployment has been falling fast, other labor market indicators still show weakness. Last week, Fed Chairwoman Janet Yellen cited low levels of labor-force participation and slow wage growth as signs of continued “significant slack” in the job market. The Fed, she told lawmakers, has been fooled in the past during by pickups in economic growth that turned out to be “false dawns.”

But if the labor market turns out better than Ms. Yellen assesses, “The Fed doesn’t really have a lot of time to keep low rates for long,” Mr. Tran said.

According to futures markets, investors generally expect the Fed to raise rates more slowly than Fed officials project they will.

A second source of uncertainty is how much of a role the Fed and other central banks will play in preventing new bubbles in the financial system.

Ms. Yellen said in a recent speech that interest rate increases should be a last line of defense against possible asset bubbles and that central banks would do better to use supervision and regulation as the primary tools for reducing risks of market excesses and making the financial system more resilient. Her comments were echoed soon thereafter by European Central Bank President Mario Draghi and Bank of England deputy governor Jon Cunliffe.

But if markets remain buoyant and more central bankers start to believe that purely supervisory measures may be insufficient, “at some point there will be acceptance that monetary policy will need to join forces and address financial stability or systemic risks concerns,” Mr. Tran said.

The third area of uncertainty is how the Fed will raise interest rates when the time comes, a matter of lengthy internal discussions in recent months. Fed officials have indicated that of the three interest rate tools they plan to use, they expect the “central role” to be played by the interest rate the Fed pays banks on the reserves they park at the central bank.  The June meeting minutes suggested that Fed officials see their benchmark federal funds rate and another new tool they’re testing—reverse repurchase agreements–playing secondary roles. But they haven’t decided exactly how they will use the tools.

“If you have three rates, and they move unexpectedly among each other, it would be introducing another element of uncertainty,” Mr. Tran said.