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30-06-2014, 01:16 PM
‘Euphoric’ markets at risk of another crash
PUBLISHED: 0 HOUR 42 MINUTES AGO | UPDATE: 0 HOUR 42 MINUTES AGO
PHILIP BAKER
Disappointing element of deja vu from investors
Bankers have a habit of comforting themselves with facts and figures and coming up with a thousand reasons why there won’t be a repeat of all the mistakes that led to the financial crisis of 2008.
And they’re probably right; once investors lose money and learn a lesson, they are unlikely to repeat those mistakes.
The problem is, financial markets end up making entirely new mistakes and it’s those mistakes that spark the next crisis.
That theory seems to be the latest message from the bank for central banks, the Bank for International Settlements, which has warned that financial markets are losing touch with reality and another crisis could be just around the corner.
The BIS says financial markets are in a “euphoric’’ state and is calling for central banks around the world to lift interest rates as soon as they can.
Record low interest rates have fuelled a frenzy and the BIS are worried that the cheap money has caused a “disconnect between the markets’ buoyancy and underlying economic developments globally,” the bank wrote in its latest annual report released on the weekend.
“Financial markets have been exuberant over the past year, at least in advanced economies, dancing mainly to the tune of central bank decisions,” it also wrote.
“Volatility in equity, fixed income and foreign exchange markets have sagged to historical lows. Obviously, market participants are pricing in hardly any risks.”
It’s not the first time the bank has made these sorts of warnings. Just over 10 years ago the chief economist at the BIS, Bill White, warned that the ultra cheap money, provided by central banks such as the US Federal Reserve, would end in tears but his comments were largely shrugged off.
In addition to the BIS’s latest warning, that the current glow from shares, bonds and property is on shaky ground, Bill White has recently pointed out that the world is looking like a dangerous place again.
Behind all the warnings are signs that investors have built up speculative bubbles, just like they did in 2007, when sharemarkets were overvalued and credit spreads in the bond markets had contracted to record lows.
The BIS annual report released at the weekend said a “persistent easing bias” by policymakers had lulled governments “into a false sense of security” that meant the real reforms never see the light of day and investors get used to record low interest rates.
“Policy does not lean against the booms but eases aggressively and persistently during busts,” the BIS said. “This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap”.
Furthermore, the record low rates eventually “lose their effectiveness and may end up fostering the very conditions they seek to prevent.”
So, while the underlying problems might be the same, it’s central bank policy that creates the next crisis while trying to clean up the mess of the first one.
And this time around there are some similarities.
There has been another large increase in debt levels. Private debt outside the banks is now about 30 per cent larger than where it was before the 2008 global financial crisis. The BIS are worried that the run up in debt has gone to all the wrong areas again and warn that because governments have failed to deal with the issues that caused the original crisis there could be a “bigger one down the road”.
The report comes as the European Central Bank prepares to meet this week, with some analysts expecting ECB president Mario Draghi to announce a version of the US Fed’s “quantitative easing” program in the months ahead. However, at the same time the Bank of England is getting investors ready for a rate rise.
PUBLISHED: 0 HOUR 42 MINUTES AGO | UPDATE: 0 HOUR 42 MINUTES AGO
PHILIP BAKER
Disappointing element of deja vu from investors
Bankers have a habit of comforting themselves with facts and figures and coming up with a thousand reasons why there won’t be a repeat of all the mistakes that led to the financial crisis of 2008.
And they’re probably right; once investors lose money and learn a lesson, they are unlikely to repeat those mistakes.
The problem is, financial markets end up making entirely new mistakes and it’s those mistakes that spark the next crisis.
That theory seems to be the latest message from the bank for central banks, the Bank for International Settlements, which has warned that financial markets are losing touch with reality and another crisis could be just around the corner.
The BIS says financial markets are in a “euphoric’’ state and is calling for central banks around the world to lift interest rates as soon as they can.
Record low interest rates have fuelled a frenzy and the BIS are worried that the cheap money has caused a “disconnect between the markets’ buoyancy and underlying economic developments globally,” the bank wrote in its latest annual report released on the weekend.
“Financial markets have been exuberant over the past year, at least in advanced economies, dancing mainly to the tune of central bank decisions,” it also wrote.
“Volatility in equity, fixed income and foreign exchange markets have sagged to historical lows. Obviously, market participants are pricing in hardly any risks.”
It’s not the first time the bank has made these sorts of warnings. Just over 10 years ago the chief economist at the BIS, Bill White, warned that the ultra cheap money, provided by central banks such as the US Federal Reserve, would end in tears but his comments were largely shrugged off.
In addition to the BIS’s latest warning, that the current glow from shares, bonds and property is on shaky ground, Bill White has recently pointed out that the world is looking like a dangerous place again.
Behind all the warnings are signs that investors have built up speculative bubbles, just like they did in 2007, when sharemarkets were overvalued and credit spreads in the bond markets had contracted to record lows.
The BIS annual report released at the weekend said a “persistent easing bias” by policymakers had lulled governments “into a false sense of security” that meant the real reforms never see the light of day and investors get used to record low interest rates.
“Policy does not lean against the booms but eases aggressively and persistently during busts,” the BIS said. “This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap”.
Furthermore, the record low rates eventually “lose their effectiveness and may end up fostering the very conditions they seek to prevent.”
So, while the underlying problems might be the same, it’s central bank policy that creates the next crisis while trying to clean up the mess of the first one.
And this time around there are some similarities.
There has been another large increase in debt levels. Private debt outside the banks is now about 30 per cent larger than where it was before the 2008 global financial crisis. The BIS are worried that the run up in debt has gone to all the wrong areas again and warn that because governments have failed to deal with the issues that caused the original crisis there could be a “bigger one down the road”.
The report comes as the European Central Bank prepares to meet this week, with some analysts expecting ECB president Mario Draghi to announce a version of the US Fed’s “quantitative easing” program in the months ahead. However, at the same time the Bank of England is getting investors ready for a rate rise.
