Tuesday, October 14, 2014

IMF Report: Heat Wave - Rising Financial Risks in the US

It seems like almost every day now the IMF is issuing another warning of some kind. This time we have this IMF report titled "Heat Wave - Rising Financial Risks in the United States".

I have not seen this report mentioned much anywhere in either the mainstream or alternative media blog sites. But the report once again lists the concerns about whether the stimulation policies of the Fed are leading to an unsustainable buildup in financial assets. This report even provided a "heat wave" graphic which the report says "shows that financial risk taking in corporate debt markets is rising and markets have begun to overvalue many assets".

Below are some quotes from the report, then a comment.


"The heat map shows that financial risk taking in corporate debt markets is rising and markets have begun to overvalue many assets. Spreads in the high-yield and leveraged loan markets are not far from levels seen before the financial crisis. The quality of new loans issued is also declining, especially in the leveraged loan market where the amount of leverage in new deals is rising. The number of “covenant-lite” deals which give lenders less control over issuers has increased. For example, many new deals allow borrowers to issue more debt in the future without obtaining prior permission from lenders."

"Meanwhile, the risk that many investors could sell their holdings all at once is now even higher than before the crisis. Mutual funds, exchange traded funds, and households hold about 30 percent of corporate bonds as of the end of June 2014.The worry is that such “retail” investors could start selling suddenly if the value of their assets deteriorates unexpectedly."

"For example, high-yield corporate and emerging market bond markets saw large retail outflows in May and June 2013, when investors panicked during the “taper tantrum” episode. That event was relatively short-lived and did not involve institutional investors."

"A more severe episode of flight from risk by retail investors could lead to even greater financial volatility with wider systemic repercussions than were suffered during the 2013 event."

"The United States is getting closer to ending six years of policies designed to stave off the worst effects of the crisis. The U.S. banking system is now much more resilient, and economic risk taking by households and corporations is taking hold. For the sake of a smooth exit and a durable recovery, not only in the United States but gobally, it is critical that officials continue to respond to rising financial stability risks."


My added comment:

As mentioned above, this IMF report has not gotten much media attention. By now it should be clear to readers here that financial authorities are concerned about what is going to happen when the Fed ends its current QE program. And well they should be. There is no evidence yet whatsoever that the economy and stock market can stand own its own two feet without all the artificial support from the Central Banks like the Fed. Indeed, in Europe it seems that the evidence continues to show just the opposite. Same in Japan. And maybe in China too.

One gets the feeling the IMF and Central Banks are just keeping their fingers crossed and hoping things will not go south in a hurry once the Fed ends QE. They clearly worry that assets (specifically corporate bonds in this report) are overstated from the effects of the QE stimulus of the last few years. The report says point blank: "The worry is that such retail investors could start selling suddenly if the value of their assets deteriorates unexpectedly." You could apply this same concern to the US stock market and real estate markets as well. They may be "overstated" too due to all the monetary stimulus. These next 6-8 months look to be huge.

All these constant warnings and statements of concern are not particularly confidence inspiring. On the one hand it is good that thought is going into the potential problems and what to do about them. On the other hand, one has to wonder if all these reports are more to cover themselves so they can say they warned us if things do go south. And if they really have any tools left to deal with the problems if that does happen?

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page 

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