Please take note about the following quotations.
From BIS (Bank for International Settlements) 84th Annual Report:
"... it is hard to avoid the sense of a puzzling disconnect between
the markets’ buoyancy and underlying economic developments
globally.... Despite the euphoria in financial markets, investment
remains weak.
Instead of adding to productive capacity, large firms
prefer to buy back shares or engage in mergers and acquisitions.
As history reminds us,
there is little appetite for taking the
long-term view. Few are ready to curb
financial booms that make everyone feel illusively richer. Or to hold back on quick
fixes for output slowdowns, even if such measures threaten to add fuel to
unsustainable financial booms. Or to address balance sheet problems head-on
during a bust when seemingly easier policies are on offer. The temptation to go for shortcuts is simply
too strong, even if these shortcuts lead nowhere in the
end.
- Bank of International Settlements, 84th Annual Report
It was a year ago when the general manager of the Bank of International
Settlements (the
central banks' central bank), Jamie Caruana, warned
that the "Monetary Kool-Aid Party is Over". Since then central banks have proven their own
supervisor wrong in their ability to kick the can, because even as the Fed has
commenced tapering its own QE the ECB has more than offset the Fed's brief
attempt at policy normalization by escalating, for the first time in history,
from ZIRP to NIRP. In other words, the Kool-Aid keeps flowing.
Which brings us to the BIS' just released annual report. There are many
reason to read the full report cover to cover, but perhaps the most prominent
one is that, once again, the Bank of International Settlements has merely
compiled a book report of all Zero Hedge posts not only over the past year, but
since our inception.
A quick summary of the report
comes
from FT:
The Bank for International Settlements has warned that “euphoric”
financial markets have become detached from the reality of a lingering
post-crisis malaise, as it called for governments to ditch policies that risk
stoking unsustainable asset booms.
While the global economy is struggling to escape the shadow of the crisis of
2007-09, capital markets are “extraordinarily buoyant”, the Basel-based bank
said, in part because of the ultra-low monetary policy being pursued around the
world. Leading central banks should not fall into the trap of raising rates “too
slowly and too late”, the BIS said, calling for policy makers to halt the steady
rise in debt burdens around the world and embark on reforms to boost
productivity.
In its annual report, the BIS also warned of the risks brewing in emerging
markets, setting out early warning indicators of possible banking crises in a
number of jurisdictions, including most notably China.
“Particularly for countries in the late stages of financial booms,
the trade-off is now between the risk of bringing forward the downward leg of
the cycle and that of suffering a bigger bust later on,” it said.
The BIS, the bank for central banks, has been a longstanding sceptic
about the benefits of ultra-stimulative monetary and fiscal policies and its
latest intervention reflects mounting concern that the rebound in capital
markets and real estate is built on fragile foundations.
Or, as Hyman Minsky and Zero Hedge would call it "common sense."
But why use an establishment paper, one whose very existence has repeatedly
been shown to rely on perpetuating the broken and unsustainable status quo, when
one can quote from the BIS itself. Of course, to anyone who has read Zero Hedge
either extensively or in isolation in the recent and not so recent past, all of
this will be very familiar territory.
Below we present some of the key excerpts from the 84th BIS Annual Report. As
you read these, please recall all those
idiots who said the Fed
is not solely focused on boosting stock prices and that anyone claiming that is
a conspiracy theorist.
Overall, it is hard to avoid the sense of a puzzling disconnect
between the markets’ buoyancy and underlying economic developments
globally.
The global economy continues to face serious challenges. Despite a pickup in
growth, it has not shaken off its dependence on monetary stimulus. Monetary
policy is still struggling to normalise after so many years of extraordinary
accommodation. Despite the euphoria in financial markets, investment remains
weak.
Instead of adding to productive capacity, large firms prefer to buy back shares or
engage in mergers and acquisitions. And despite lacklustre long-term
growth prospects, debt continues to rise. There is even talk of secular
stagnation.
And here the BIS explains broken markets so easily, even a Janet Yellen can
get it:
Financial markets have been exuberant over the past year, [...]
dancing mainly to the tune of central bank decisions. Volatility in
equity, fixed income and foreign exchange markets has sagged to historical lows.
Obviously, market participants are pricing in hardly any risks.
Growth has picked up, but long-term prospects are not that bright.
Financial markets are euphoric, but progress in strengthening banks’
balance sheets has been uneven and private debt keeps growing.
Macroeconomic policy has little room for manoeuvre to deal with any
untoward surprises that might be sprung, including a normal
recession.
There is a common element in all this. In no small measure, the causes of the
post-crisis malaise are those of the crisis itself – they lie in a collective
failure to get to grips with the financial cycle. Addressing this failure calls
for adjustments to policy frameworks – fiscal, monetary and prudential – to
ensure a more symmetrical response across booms and busts. And it calls
for moving away from debt as the main engine of growth. Otherwise, the
risk is that instability will entrench itself in the global economy and room for
policy manoeuvre will run out.
The combined public sector debt of the G7 economies has grown by
close to 40 percentage points, to some 120% of GDP in the post-crisis period
– a key factor behind the 20 percentage point increase in total (public
plus private sector) debt-to-GDP ratios globally.
... government debt-to-GDP ratios have risen further; in several cases, they
appear to be on an unsustainable path.
Once more,
communication from the Federal Reserve and the ECB [...]
helped support credit and equity markets, with the major stock
exchanges reaching record highs in May and June 2014.
The S&P 500 Index, for gained almost 20% in the 12 months to May 2014,
whereas expected future earnings grew less than 8% over the same
period. The cyclically adjusted price/earnings ratio of the
S&P 500 stood at 25 in May 2014, six units higher than its average over the
previous 50 years.
On record low default rates:
Low corporate bond yields not only reflect expectations of a low likelihood
of default and low levels of risk premia,
but also contribute to the
suppression of actual default rates, in that the availability of cheap
credit makes it easier for troubled borrowers to refinance.
The
sustainability of this process will ultimately be put to the test when interest
rates normalise.
What forward guidance leads to:
If the public fails to fully understand the conditionality of the guidance,
the central bank’s reputation and credibility may be at risk if the rate path is
revised frequently and substantially, even though the changes adhere to the
conditionality originally announced. Forward guidance can also give rise to
financial risks in two ways. First, if financial markets become narrowly focused
on it, a recalibration of the guidance could lead to disruptive market
reactions. Second, and more importantly, forward guidance could lead to a
perceived delay in the speed of monetary policy normalisation. This
could encourage excessive risk-taking and foster a build-up of financial
vulnerabilities.
As Bloomberg summarizes, "
Central bank policy makers, who expressed
concern low market volatility is masking future risks, are helping suppress
price swings with their accommodative monetary policy."
The developments in the year under review thus indicate that monetary policy
had a powerful impact on the entire investment spectrum through its effect on
perceived value and risk. Accommodative monetary conditions and low
benchmark yields – reinforced by subdued volatility – motivated investors to
take on more risk and leverage in their search for
yield.
But the biggest "heresy": even the BIS is suggesting that, gasp, deflation
isn't the end of the world:
It is essential to discuss the risks and costs of falling prices
in a dispassionate way. The word “deflation” is
extraordinarily charged: it immediately raises the spectre of the Great
Depression. In fact, the Great Depression was the exception rather than the
rule, in the intensity of both its price declines and the associated output
losses. Historically, periods of falling prices have often coincided
with sustained output growth. And the experience of more recent decades
is no exception. Moreover, conditions have changed substantially since the
1930s, not least with regard to downward wage flexibility. This is no reason to
be complacent about the risks and costs of falling prices: they need to be
monitored and assessed closely, especially where debt levels are high.
But it is a reason to avoid knee-jerk reactions prompted by
emotion.
And the punchline:
Never before have central banks tried to push so hard.
Which nobody will care about until it's too late, for one simple reason:
As history reminds us, there is little appetite for taking the
long-term view. Few are ready to curb
financial booms that make everyone feel illusively richer. Or to hold back on quick
fixes for output slowdowns, even if such measures threaten to add fuel to
unsustainable financial booms. Or to address balance sheet problems head-on
during a bust when seemingly easier policies are on offer. The temptation to go for shortcuts is simply
too strong, even if these shortcuts lead nowhere in the
end.
So when even the BIS says it's game over, it may be time to sell every last
VIX contract, because the alternative - admission that the central banks have
finally failed - is hardly an enjoyable one.
The alternative message is more pleasant: indeed - why worry. Just because
every single previous central-bank inflated bubble has always burst,
resulting in tears for most (if not those who precipitated the crash and managed
to load up on liquidating hard assets at firesale prices)
this time will
be different.
As for the BIS authors of its last two annual reports:
please stay
away from nail guns."
