The Bank of International Settlements, an international finance watchdog that serves as a counter-party for national central banks, has again warned that investors are unprepared for a potential financial crash.
Jaime Caruana, head of the BIS, told The Telegraph that he believed the world economy is as vulnerable to crisis now as it was in 2007, because nobody in stocks seems prepared for the idea that at some point soon central banks will begin raising interest rates again. The BIS previously described stocks as “euphoric.”
Currently, most major central banks – including the Bank of England and the U.S. Federal Reserve – are holding rates at around zero percent. That is boosting stocks, because there is no point in investors keeping their money in savings accounts at such low returns.
Thus, an “irrational” bubble is looming again in stocks. Mr Caruana declined to be drawn on when the bubble will burst. “As Keynes said, markets can stay irrational longer than you can stay solvent,” he said.
Emerging markets have racked up $2 trillion in foreign currency debt since 2008. They are a much larger animal than they were during the East Asia crisis of the late 1990s, so any crisis would do more damage. “The ramifications would be particularly serious if China, home to an outsize financial boom, were to falter,” it said.
And that’s not even the scary part. Look at China, Caruana says, which has had a private credit boom of its own, also fueled by low interest rates (if interest is low, people tend to get further into debt because the cost of the debt is so low). China is unprepared to shed that debt without pain, BIS sources told The Telegraph: “BIS officials doubt privately the whether China can avoid a ‘hard landing’, fearing that the extreme credit growth over the last five years must lead to a financial reckoning. They also doubt whether the aftermath will in the end be easier to deal with in a state-controlled banking system where the Communist Party controls the credit levers.”
Right on cue, Mohamed El-Erian, the former PIMCO chief and current chief economic adviser to Allianz, wrote an op-ed in the Financial Times that sees the world looking much the same way. Stocks are booming in a way that doesn’t reflect the underlying economic fundamentals, he says: “unusually sluggish economic growth has not harmed stock market performance as much as would have been expected from traditional models; second, that hyperactive central banks have boosted asset prices using experimental measures, not as an end in itself but as a means of stimulating higher economic activity through the ‘asset channel’. The result has been a notable gap between a buoyant Wall Street and a struggling Main Street.”
So the bubble still has some room to grow, maybe…
Source: Business Insider
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Comments:
After the world economy slightly recovered from the great recession’s attacks in 2008, the growth of stock exchange indices has started. The trigger for this growth was the liquidity, thrown into the economy by the central banks.
Everyone knows that any bubble cannot grow forever. Hence, all financial analysts and traders have in mind one question: ”when the value of shares will begin to fall?” Though they cannot predict the crisis start time. They understand that a new recession can begin for them so suddenly, like the previous one in 2008. However, the head of the Bank of International Settlements, in order to justify his confusion, declares that the stock market is irrational. In plain English translation, he wants to say: ”In case of a new crisis, it will no longer be our [bankers] fault, but the stock market’s fault itself. The stock market is absolutely unpredictable, and there is nothing we can do about it”.
But in reality it is not the stock market, but the behaviour of market players is irrational. The goal of today’s bankers is not an industrial development or improving the quality of people’s lives. Their goal is to get maximum profit.
When money serve to people, people and money behave rationally. Though when people serveto money, then what can be rational in the behavior of such people? The financial system turns into a game of luck, hence it is not more rational than gambling.