Friday, October 17, 2014

"No One Could Foresee this Coming"

One of the things I recall very vividly about the financial crisis that hit in 2007-2008 was the phrase "no one could foresee this coming" after the crisis unfolded. Financial officials and financial media repeated that phrase over and over. 

It struck me as odd then because I had been reading several analysts for years who did foresee it coming and predicted almost exactly what happened. I guess this time the financial authorities want to make sure no one can say they didn't warn us. Here is yet another major warning coming from the BIS as reported in this new article in The Telegraph. Below are some quotes from the article and then comments.


BIS warns on 'violent' reversal of global markets

Investors take zero-rates for granted and unwisely believe that central banks will protect them, says the capital markets chief of the Bank of International Settlements

"The global financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned."
"Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress." (link to his speech)
"Mr. Debelle, who is also chief of financial markets at Australia’s Reserve Bank, said any sell-off could be amplified because nominal interest rates are already zero across most of the industrial world. “That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer close to zero, these positions will blow up,” he said."
"The BIS warned earlier this summer that the world economy is in many respects more vulnerable to a financial crisis than it was in 2007. Debt ratios are now far higher, and emerging markets have also been drawn into the fire over the last five years. The world as whole has never been more leveraged."
"Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since the Lehman Brothers crash."

"The biggest worry is a precipitous sell-off in the bond markets once the US Federal Reserve and the other major central banks begin to tighten in earnest. Mr Debelle cited the US bond crash in 1994, but warned that it could be even more violent this time with a “fair chance that volatility will feed on itself”.
My added comment: We are doing everything we can here on this blog to make sure readers are aware of all these continuing warnings being issued. As noted in this article the BIS (Bank of International Settlements) came out twice earlier this year with warnings. The IMF has come out several time including two times just in this past week with similar warnings.
It's almost to the point where I am hesitant to keep posting all these because readers may view this as too extreme with too much gloom and doom. But everything we are posting here are direct quotes coming from the leading financial institutions in the world. These are their warnings. We are just compiling them here so they will be on the record here as an archive. If you go to the right side of this blog and just look at the links over the last several months you will find several links to all these warnings from the IMF and the BIS.
We have noted all this is kind of surreal because at the same time we have all these warnings we get constant financial media reporting that the US is in a recovery and that things are improving. The labor market shows some signs of improvement and the stock market (until this week) was near all time highs. Real estate has recovered to some degree (in some areas more than others). Some economic indicators appear to show some progress while others don't.
But despite all this, there is this nagging feeling that things are not right. This week that feeling got amplified as stock markets fell sharply and suddenly there is new talk of more QE and conerns about the global economy and deflation. And of course, we are getting this constant stream of warnings like the one above from places like the IMF and the BIS. 
What we are encouraging here is to keep alert and stay informed. It is crystal clear that the economy has not yet proven that it can stand on its own feet if the Fed pulls out of QE. It is also crystal clear from all these warning articles we have posted that the financial authorities realize this and are issuing warnings right and left about what may happen without monetary stimulus to act as support (look at the direct quote in the article just above).
We have pledged to follow it here and will try to stay on top of things as best we can. Events can change very quickly as we have seen. But one thing is for sure. Readers here will not be saying "no one could foresee this coming" if these warnings come to pass. It looks more and more like we will get a clearer picture by the spring of 2015. Maybe sooner.

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

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