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.