Economic Growth

Central Banks Juicing Weak Global Economy? So Suggests International Watchdog.


Credit trap
bitzcelt / Foter

Those booming financial markets around the world look like a bubble driven by central bank-minted cheap money, warns the Bank for International Settlements (BIS). In its annual report, the Switzerland-based bank for central banks cautioned that investors have become dependent on easy money for profits at a time when "malaise persists" in the global economy and "growth in advanced economies remains below pre-crisis averages."

According to the latest report:

Financial markets have been acutely sensitive to monetary policy, both actual and anticipated. Throughout the year, accommodative monetary conditions kept volatility low and fostered a search for yield. High valuations on equities, narrow credit spreads, low volatility and abundant corporate bond issuance all signalled a strong appetite for risk on the part of investors. At times during the past year, emerging market economies proved vulnerable to shifting global conditions; those economies with stronger fundamentals fared better, but they were not completely insulated from bouts of market turbulence. By mid-2014, investors again exhibited strong risk-taking in their search for yield: most emerging market economies stabilised, global equity markets reached new highs and credit spreads continued to narrow. Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally.

Just a few months ago, the BIS warned that global debt markets had risen to $100 trillion, with governments as the main perpetrator.

Debt and easy money can't continue driving the world forever forever, the report cautions. "Over the longer term, raising productivity holds the key to more robust and sustainable growth."

Running up the credit cards isn't a stand-in for actual prosperity? You don't say.

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  1. I can hardly wait for Plugs to slag the BIS, for saying what many around here have been saying for years.

    1. Well, his credibility is quite high, having called on people to short gold, months ago, since it was going down to $600/oz or less…oh, wait.

      1. I said to short gold years ago when it was $1700 or so. I called BULLSHIT on the Rick Santelli inflationistas right at the beginning of this upturn (mid 2009).

        You can’t have inflation with the enormous excess capacity we had then (and still have).

        1. Broad price inflation requires the increased money supply to be broadly distributed. Since that money was mostly accessible only to the banking plutocrats that back the current establishment (and that is meant to include the bipartisan establishment) and major entrenched corporations, the money never really reached the broad economy nor resulted in price inflation. Hence, the inflation has occurred almost exclusively in equities and RE.

          1. This inflation stuff is a lot easier if people talk about it right and stop concerning themselves with “price inflation”. Inflation is monetary.

            Prices change with market conditions and that may or may not have anything to do with inflation.

            1. ^This. Well said, robc.

            2. While inflation is indeed a monetary phenomenon, its impact on the broader economy varies depending on its distribution. Asset inflation spurns economic activity to some extent due to the wealth effect (even if the money is largely inaccessible due to being unrealized), but doesn’t have the pernicious effects of broad price inflation. Broad price inflation is what will cripple an economy. And given the high leverage of the federal govt and the budget vulnerability to fluctuations in interest rates, broad price inflation is what will ruin us.

              The policy of the Fed has been to pursue large asset inflation that manifests itself as negligable price inflation. They’ll continue to do this up until the point that their asset inflation leads to broad price inflation. And when that happens, the dollar collapses.

              1. +1

                One only has to look at home prices in the run up to the bubble breaking.

                Obviously monetary policy leaned towards housing loans and surprise surprise house prices inflated.

                Now we are seeing the same thing with stocks. Investment and banking firms are getting free money from the government to invest in stocks…should be no surprise that we now have a stock bubble.

          2. + $2 trillion in excess reserves

          3. Also, tons of that money left America for places it could be invested productively.

        2. You can’t have inflation with the enormous excess capacity we had then (and still have).

          Energy prices disagree with you.

    2. “The BIS are a bunch of Bircher chirstfag goldbug dead-enders!!!”

      – Shike

  2. As long as I exit the market in time, I’m OK with this.

    1. If you’re out by early 2017 you should be good. These used to be 10-12 year cyclicals, but they seem to be compressing as the the printers keep pressing ever faster. A good rule of thumb to follow nowadays is 8 years from crater to crater.

      1. Out into what? Cash obviously is no good. Gold has its own risks, as does real estate.

        1. I did REITs in established markets. After a crash, there’ll be more people renting. Cha Ching!

          1. REITs may have some trouble in certain markets. Markets like Los Angeles have seen enormous compression on cap rates for commercial properties but rent to income ratios are not favorable to any continued increases in rents. And depending on the nature of the financing obtained by the REITs for the various projects (namely mezz financing for new construction projects), the operating profitability can be compromised and the broad credit freeze can make selling the asset at break even levels impossible in the near term.

        2. Assuming that the next financial armageddon proceeds from the same root causes as the one prior, it will again be characterized by deflationary pressures, deleveraging, and decline in output. All of these make cash seem a safer position than equity ownership.

      2. I’m slowly drifting away. I actually spent a lot of time working it out last week.

        I went into REITs and global volatility funds to hedge against the bubble bursting.

      3. The cycle is compressing and we didn’t even have a real boom period this time. Although, fiscal and regulatory policy may have had as much to do with that as monetary policy.

    2. The entry to the market is a multi-lane superhighway. The exit is a single lane dirt road.

      1. This. I had to call Etrade yesterday because their “guaranteed 2 second execution” wasn’t working. They told me that it usually only works when your buying. I had to wait 48 hours for a sell order to go through.

  3. Yeah, warns a lot of people.

  4. built the Internet

    Not just the internet, but everything in the U.S. was built by fedgov. Because “you didn’t build that”

    1. Goddamnit. Wrong article.

      1. No worries.

        You did not build that mis-post.

  5. the Switzerland-based bank for central banks

    *kneels before Zod*

    1. I read a couple of books on volatility trading this month, and it always seems to come back to the Swiss. They’re always up to something.

      1. “What makes a man turn neutral … Lust for gold? Power? Or were you just born with a heart full of neutrality?”

  6. So. Are we doomed, mega-doomed, fucked, or mega-fucked?

    1. Doomcock.

  7. Yellen: Fed will keep interest rates low even when economy recovers


    Federal Reserve Chairwoman Janet Yellen signaled continued low interest rates in her semiannual report to Congress on Tuesday, noting that the U.S. economic recovery is “not yet complete” and too many Americans remain unemployed.

    “Don’t worry. Easy money forevah!”

    1. Add a long term bond index fund to my to do list.

    2. Credit is tough so therefore there is no “easy money” unless you are Apple or Warren Buffett.

      I think you meant cheap money if you qualify for it.

      1. Actually, credit is very easy there is tons of sub-prime car loans right now and it’s getting worse.

        1. Exactly. You should see some of the investors getting financing for new construction projects these days. These guys have arch plans and entitlements, but when I ask for basic proformas and projection sheets, you’d think I was asking them to translate the dead sea scrolls.

      2. Credit is tough so therefore there is no “easy money” unless you are Apple or Warren Buffett.


        Probably the only intelligent thing you have said in years.

        But you are incapable of seeing how the facts you just stated is the very house of cards that is poised to come tumbling down.

  8. High valuations on equities


    The WSJ lists the forward P/E of the S&P 500 at 16.5 – which is right smack in the middle of its historical norm.

    Equities are up because earnings are incredibly good and not because central banks are buying Treasuries.

    1. You better double check with your girl Yellen. Today she said small cap, biotech, and social media are overpriced. Get your shit together, dummy.

      1. Biotech and stocks are always where earnings are way out in the future based on products that may never work or gain FDA approval.

        The Amgens and Biogens are rare birds.

      2. What the fuck is the FED doing running around giving stock tips for?

        Also funny how the FED don’t like stocks that actually do stuff.

        Please don’t look at the financial stocks behind the curtain which are loaned FED money then buy FED securities with that money which in turn the FED loans right back which they then use to buy more FED securities which in turn the FED loans right back which they then use to buy more securities which in turn the FED loans right back which they then use to buy more FED securities which in turn the FED loans right back which they then use to buy more FED securities which in turn the FED loans right back which they then use to buy more FED securities which in turn the FED loans right back which they then use to buy more FED securities which in turn the FED loans right back which they then use to buy more FED securities which in turn we are all fucking doomed.

      1. That is fair. But in 2007 much of the debt and earnings were based on poor credit undertakings (mortgages and MBS). That silge has been removed from today’s market. Banks are entering their cyclical sweet-spot.

        Sovereign debt? Even Greece and Ireland are on the rebound.

        1. Current data compared to data from the last major financial hurdle of 2008 seem to indicate that the burst is around the corner, around 9-18 months away. However the current data compares to 1996 data relative to the 1999/2000 stock implosion. Like I said, above and have been saying for a while now, I think the current market turns sour ceteris parabis in late 2016 early 2017.

          And short of a Rand Paul type figure stewarding the ship of state at that point, we’ll double down with the same bubble policies that caused the last three crescendo to crash scenarios. The holy fucking shit hitting the fan moment is the collapse that follows that one in the mid 2020s. That will be the one that causes the currency collapse, as it will align with the demographics of the entitlement state being so out of whack that all hope is lost.

          This is all highly speculative and prone to much change as circumstances change. But I think we all realize that no substantive reform of SS/MC will be forthcoming in our lifetimes, so the true currency crisis is a matter of when, not if.

          1. so, for an investment newb- my IRA is heavy on stocks, US and international. Should I shift a bit more towards bonds? Seems premature but I do think the stock market is artificially high right now.

            1. Depends. How old are you? My IRA is 75% stock, 25% bond. As I get older, the bond share will increase.

              1. ^This. Somewhere between 80/20 to 70/30 Equity/Bond ratio should be the rule until late your 30s or even 40s.

                If anything, you should focus more on minimizing fees and chosing no load index funds with low management overhead. You’ll gain more from minimizing transaction costs than from trying to time markets within an IRA.

              2. 30. Mine’s the same, but I feel it might be aggressive at 90/10 right now. And yeah mine shifts towards bonds as I get older too (target retirement 2050).

                1. I recommend VFIFX. .18% expense ratio, and it has returned 18% annually for the last five years.

                  I’m 5 years ahead of you, so I went with VTIVX.
                  It’s a decent enough fund that I even own some in a non-tax sheltered account also.

                  1. Oh, and it is about 90/10, but a decent mix of domestic and international stocks and bonds.

                  2. actually what I have lol

            2. Seems premature but I do think the stock market is artificially high right now.

              It is artificially high right now, but with an IRA you’re talking about a long term savings for retirement so eventhough the market will correct, it will rebound again after that correction. A lot depends on your age, but if you’re youngish (20’s/early 30’s) like myself, your asset allocation should remain heavily tilted towards equities. Don’t let concerns over short term movements cloud the long term strategy.

              1. yup, that’s my mindset but sometimes you gotta hear it from other people.

                1. My retirement strategy is actually dying in my mid 50’s of a heart attack/stroke/suicide by cop like a real man, so taking my advice may not be recommended..

          2. I think the currency collapse part can happen a hell of a lot earlier than that. China has the power to set free its Yuan but do they have the will?

        2. Sovereign debt? Even Greece and Ireland are on the rebound.

          Thanks for demonstrating exactly what the BIS head is saying ie we’re in a bubble.

  9. Seriously, though. Is there any way this can end non-catastrophically in the near future? I would love to believe that there’s a chance that we’re not fucked.

    1. Well, it depends on a single question: Is it different this time, or do we revert to mean?

      If you think we’re special snowflakes and can transcend all known rules of economics then, yippy, we’re NOT fucked.

    2. It’s a casino, and the house always wins.

      I’m just trying to eat my free lunch before mealtime is over and the check comes.

    3. No, because “we” chose to avoid that the previous time.

      TARP guaranteed a crappy economy until at least 2020, and I see that as too short term now.

      We need a good old fashioned cleanse. The depression we avoided was needed. We need to let “too big to fail” fail. Etc, etc.

      Cycles are good. Failure allows success.

      1. Cycles aren’t necessarily good because they’re created by the central banks in the first place, but they are a necessary reset to cleanse us of the imbalances the CBs created.

        1. Yeah, I realized after posting that I wasnt happy with that sentence.

    4. Get in your delorean, and run down the mother of John Maynard Keynes. Short of that, were fucked. At least in the aggregate.

  10. Time to buy cryptocurrency.

    1. Bitcoin has not seen a real downturn.

      Do we really know bitcoin won’t follow stock prices when the bubble breaks?

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