Wednesday, January 27, 2016

Did IMF Just Issure a Crisis Watch in Davos?

We mentioned this article in the UK Telegraph earlier, but it deserves a more in depth review. Given the source (a Deputy Director at IMF) and the substance of his comments, it is fair to ask if the IMF has given us a Crisis Watch. We have stated many times here on this blog that even though we have not had another major crisis, the conditions for one do exist. 

We have documented the many systemic risk warnings from both BIS and IMF. We have covered Jim Rickards prediction on this and many other respected analysts. We have even heard from a former IMF official (Dr. Warren Coats) who has written that if the US does not address its debt problem, a crisis is possible. Dr. Coats actually refers to Jim Rickards crisis forecast in his writings to make his point. With all that background, let's look at this UK Telegraph article. 

Below are some important quotes. I will add some comments after that. It should be noted that after his initial interview in the UK Telegraph, Zhu Min seems to walk back his comments in this interview to assure listeners he does not see a "meltdown" coming. This is typical of what you see from IMF officials at times - almost apocalyptic phrases along with re-assurance that they really don't think it will be that bad. 


Rising Fed interest rates means "liquidity could drop dramatically, and that scares everyone", warns IMF deputy

"The International Monetary Fund is increasingly alarmed by signs that market liquidity is drying up and may trigger an even more violent global sell-off if investors rush for the exits at the same time.
Zhu Min, the IMF's deputy director, said the stock market rout of the last three weeks is just a foretaste of what may happen as the US Federal Reserve continues to raise interest rates this year, pushing up borrowing costs across the planet.
. . . . .
"The key issue is that liquidity could drop dramatically, and that scares everyone," he told a panel at the World Economic Forum in Davos.
"If everybody is moving together we don't have any liquidity at all. We have to be ready to act very fast," he said."
"Zhu Min said the worry is that policy-makers still do not understand the complex interactions in the global financial system, where vast sums of money can move across borders at lightning speed."
"What the IMF has observed is that market correlations are near an historic peak, with aligned positions in the US equity markets four times higher than the average since 1932. This is a recipe for trouble when the Fed is tightening.
"When rates go up, market valuations have to adjust," he said."
My added comments  in bullet point form below:
- please note the article headline pointing the finger of blame at the US Fed
- note the terms - "market liquidity is drying up" and "violent global sell-off" - very strong language given the IMF has only said they just expect some lower growth
- stock market drop is just a hint of what may happen due to Fed raising rates
- a liquidity drop that "scares everyone" - more very serious language
- "we have to be ready to act very fast"  -  why?  see next point
- policy makers do not understand complex interactions and the speed of global money transactions (Fed not mentioned by name, but they are policy makers)
- Fed raising rates into overvalued markets is "recipe for trouble" - in other statements from BIS and IMF the Fed has been accused of creating the overvalued markets as well with easy monetary policy - even former Dallas Fed President Richard Fisher recently pointed a finger at the Fed for creating a market bubble (while pointing out he voted against it). CNBC's Art Cashin piles on the Fed here.
Readers need to watch this closely. If we do get another major crisis (much worse than 2008 as many predict) watch the IMF and BIS to see who they blame (along with the mainstream financial media and US political leaders).

Added note: Mohamed El-Erian issues a warning, but gives a three year time period for it play out.

Additional added note to readers: When we see comments like this from an IMF official, many ask if this means the "crisis worse than 2008" Jim Rickards expects is underway. Related to that question, here is a recent twitter exchange between Jim and a follower:

, if Zhu Min stating not enough liquidity, can IMF and print enough SDR to prop central banks and forego loss in confidence.
Here is Jim's reply tweet:
. Yes, but only in more extreme circumstances than we are seeing. See, my private conversation with Zhu Min in .

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