THE FEDERAL Reserve’s unique structure helps preserve monetary policy independence, according to a new academic study that comes at a time of heightened tensions between the White House and the central bank.

Nobel laureate Edward Prescott and Rutgers University economics professor Michael Bordo argue the Fed’s deliberately decentralized design — with 12 regional banks around the country augmenting the Board of Governors in Washington — has been a source of strength.

They find the district banks have a record of contributing ideas to the economic debate, ensuring regional views are heard in Washington, and helping insulate monetary policy from politics because Fed presidents are not political appointees. Governors, including the chairman, are nominated by the US president and subject to Senate confirmation.

“Reserve banks, with the competition in ideas they can provide, are essential in preserving the flow of information and the generation of ideas within the system,” the authors write in a new working paper distributed by the National Bureau of Economic Research. District banks “ultimately help the Federal Reserve solve the changing problems it faces.”

President Donald Trump, who isn’t mentioned in the 67-page paper, has relentlessly attacked the Fed and its chairman Jerome Powell for raising interest rates. He unleashed a fresh barrage Monday, ahead of a Fed meeting this week at which officials are expected to cut rates for the first time in a decade.

Trump’s criticism overturns decades of tradition in which the White House avoided public comment on Fed policy out of respect for its independence, granted to the central bank by Congress which has tasked it to pursue maximum employment with stable prices.

That said, Trump isn’t the first US president who sought to sway the Fed. The paper’s authors give particular credit to William McChesney Martin, chairman from 1951 until 1970, for reforms on his watch that helped extricate the Fed from its war-time role of being a bureau of the US Treasury while enhancing the independence of monetary policy. — Bloomberg

WARREN BUFFETT’S warning that you only learn who’s swimming naked when the tide goes out is hardly heard these days as waves of easy monetary policy wash over the world’s financial markets.

The US Federal Reserve and fellow central banks are only trying to support economic growth and spur inflation. But their embrace of lower interest rates may pump up the price of assets that are already richly valued, or stoke demand for higher yields that come with elevated risks.

Just last week, UBS Group AG Chief Executive Officer Sergio Ermotti said that looser monetary policy could create an asset bubble. Some high-profile investors like Bridgewater Associates’ Ray Dalio and Guggenheim Partners’ Scott Minerd are sounding the alarm, too.

“The message from the Fed is loud and clear,” said Minerd. “Their overriding concern is economic growth and extending the cycle. That’s going to open the door to the Fed possibly cutting rates aggressively this year. I think we’re setting ourselves up for a period of inflating asset prices, which ultimately will not be sustainable.”

So where are the potential naked swimmers? Here are some asset classes that are already attracting scrutiny:

LEVERAGED LOANS
Few markets draw more concern than leveraged loans, used by typically junk-rated companies to fund everything from private equity buyouts to shareholder dividends.

The debt — either directly or through securitized products — usually ends up in the hands of mutual funds, pension funds, insurers and other institutional investors that are attracted to its high yields.

But leveraged loans exceeding $1 trillion in the US alone have helped fuel a surge in corporate indebtedness. Research firm Covenant Review estimates that companies using them to fund buyouts and acquisitions have seen their borrowings swell to 7.7 times earnings before interest, taxes, depreciation and amortization. Four years ago, the debt-to-Ebitda ratio was just 5.5 times.

With so much money chasing a limited supply of debt, companies have been able to borrow at cheaper rates and extract generous concessions, eroding the checks and balances that protect creditors. In fact, so-called covenant-lite loans now make up a majority of the debt issued in the market.

PRIVATE CREDIT
The global yield hunt has also spilled over into markets that were once the sole domain of banks — in particular, lending to small and medium-sized businesses that typically can’t access capital markets. The so-called private credit industry has ballooned to roughly $766 billion in assets and is on pace to hit $1 trillion soon.

Losses in private credit could dwarf those of leveraged loans in the next downturn, according to UBS. And many private debt holders are likely to need liquidity on underperforming credit positions during the next downturn, providing an opening for investors that have large cash piles, Pacific Investment Management Co. reckons.

ZOMBIE FIRMS
Easy money helps keep some businesses alive that otherwise would have shut. Such firms are defined as being unable to cover the cost of servicing their debts from operating profits over an extended period and have limited growth prospects. They now represent around 6% of non-financial listed shares in advanced economies, according to the Bank for International Settlements.

The proportion of small-cap US firms without earnings stood at 32% at the end of May, matching the highest level since the Global Financial Crisis, data from Leuthold Weeden Capital Management show.

SOVEREIGN DEBT
Even some of Europe’s riskiest government bonds have rallied to unprecedented levels. Greece, which carried out the biggest debt reorganization in history only a few years ago, now has record-low borrowing costs, with the yield on its 10-year benchmark falling below 2% last week.

Italy saw the yield on its two-year bonds slip into negative territory earlier this month and the 10-year bond yield has been halved from over 3% earlier this year. While political risks have abated in both of these countries, they still carry a huge debt burden that has spooked investors in the past, as seen in a spike in Italian yields in May last year as liquidity evaporated.

EUROPEAN CREDIT
Even some junk bonds now trade at levels where investors have to pay for the privilege of holding them. The number of such securities denominated in euros and trading with a negative yield now stands at 12, according to data compiled by Bloomberg. At the start of the year there were none.

So-called “tourist investors” — who typically buy higher rated credits — are also seeking assets further down the quality spectrum in search for better returns. European high-yield funds have attracted inflows for seven consecutive weeks totaling 3.5 billion euros ($3.9 billion). But the rush to buy junk bonds jars with fresh data on the sector — an increase in defaults.

STOCKS
The S&P 500 trades at 17-times forward earnings, even with a lackluster profit picture and remaining trade concerns. While that multiple may look high, it’s nowhere near bubble heights — the same valuation measure topped 25 before the dot-com bust.

Research Affiliate’s Arnott has pointed to big tech for potential bubble watch.

But some prominent Wall Street veterans are warning that risks are building in certain spaces. JPMorgan Chase & Co.’s Marko Kolanovic has called the performance of low-volatility versus value stocks “more significant than any relative valuation bubble” in modern history.

Rob Arnott, the founder of Research Affiliates LLC, recently flagged big tech as a potential pocket. The FANG stocks — Facebook Inc., Amazon.com Inc., Netflix Inc., and Google parent Alphabet Inc. — are up 1,167% since 2013, 10 times more than the S&P 500.

PROPERTY
An analysis by Bloomberg Economics this month found the property markets of Canada and New Zealand are the most vulnerable to a correction in house prices. Australia, Norway, Sweden and the UK are also drawing concern, according to a “housing bubble dashboard,” which takes into account ratios of house prices to rent and income as well as inflation-adjusted prices and household credit.

City-wise, markets around the world exhibiting bubble-like characteristics currently include Hong Kong, Munich, Toronto, Vancouver, London and Amsterdam, according to research by UBS. In many areas, prices have been pushed up by a wave of investors snapping up rental properties in search of better returns. — Bloomberg