Englund

A team of economists at the Bank of International Settlements took a close look at what caused the Aug. 5 market rout.  They found that nothing has really changed. They found that despite the chaos, markets held up remarkably well. But investors might not be so lucky next time — and there almost certainly will be a next time.  As volatility recedes, traders have wasted no time rushing back into some of the same leveraged bets that contributed to the initial selloff, the BIS team said.  At the end of the day, nothing has really changed. While the unwind of the Japanese yen carry trade initially received much of the blame — and rightly so — for driving the selloff, it wasn’t the only crowded strategy affected by the sudden wave of deleveraging that rocked markets. Stretched bets on stocks and options were also impacted. They all had one thing in common: Traders had increasingly deployed more leverage to chase the momentum, egged on by a prolonged stretch of low volatility....

 “Markets could at some point question fiscal sustainability,” Claudio Borrio, head of the BIS economic department, said in a press conference ahead of the release of the report. U.S. government debt has been rising even more sharply over the past decade, and the International Monetary Fund warned Thursday that it is set to reach a record high of 140% of GDP by 2032 if taxation and spending don’t change. “Such high deficits and debt create a growing risk to the U.S. and global economy,” the IMF said in its annual assessment of the U.S. economy. The BIS said that before the Covid-19 pandemic, the threat posed by high and growing debts was hidden by a long period of near-zero interest rates, which pushed debt servicing costs to historic lows.  Wall Street Journal 1 July 2024 https://www.wsj.com/economy/global/rising-government-debt-threatens-financial-stability-inflation-bis-says-e0efaf53 Annual Economic Report 2024 https://www.bis.org/publ/arpdf/ar2024e.htm - There is no way to...

Do you remember the economy of the late 1990s?  A time of prosperity — low unemployment and rapid economic growth combined with low inflation — marred by irrational exuberance in the stock market. What you might not realize is how closely the economy of early 2024 resembles that of the late Clinton years.  Many would-be home buyers, in particular, are feeling frustrated by high mortgage rates. Isn’t that a big difference from the way things were in the late ’90s? Surprisingly, the answer is no. People remember that stocks were high back then; they tend to forget that interest rates were also very high. Indeed, mortgage rates were even higher than they are now  High interest rates might last a lot longer than many people,  including me, have been predicting. Then, suddenly, things seem to have changed. What we do see is a huge surge in manufacturing investment, primarily driven by the Biden administration’s climate policies I, for one, didn’t see this coming, and as f...

 BIS has stressed the dangers of ultra-easy monetary policy, high debt and financial fragility.  Losses build up in institutions most exposed to property, interest rate and maturity risks. Over time, too, households are likely to suffer from higher borrowing costs. Banks whose equity prices are below book value will find it hard to raise more capital. The state of non-bank financial institutions is even less transparent. So, how did we get into this mess? BIS, “the extraordinary monetary and fiscal stimulus deployed during the pandemic, while justified at the time as an insurance policy, appears too large, too broad and too long-lasting”. I would agree on this.  Where I disagree with the BIS is over whether “low for long” could have been avoided. It depends, too, on whether societies long unused to inflation decide that bringing it back down is too painful, as happened in so many countries in the 1970s.  I remain unconvinced that the dominant aim of monetary policy s...

 Research presented in the report also showed that In recent decades, monetary and fiscal policy gradually moved toward the boundaries of a so-called “region of stability,” as “they were often relied upon as de facto engines of growth.” https://www.bloomberg.com/news/articles/2023-06-25/interest-rates-latest-final-hiking-stretch-will-be-hardest-bis-says Monetary and fiscal policy: safeguarding stability and trust https://www.bis.org/publ/arpdf/ar2023e2.htm BIS Annual Economic Report 2023 https://www.bis.org/press/p230625.htm

Mjuklandningar vanligare när de föregåtts av framtunga höjningscykler.   I en studie daterad till den 14 juli har BIS identifierat 29 av 70 åtstramningscykler i 25 länder sedan 1980, där centralbankerna sluppit välja och lyckats mjuklanda ekonomin.  De blytunga USA-ekonomerna Olivier Blanchard och Larry Summers argumenterar att det över huvud taget inte längre är möjligt att stoppa inflationsvågen utan en hårdlandning med betydande jobbkris.  Nils Åkesson DI 12 augusti 2022 https://www.di.se/analys/monsterhojda-rantor-da-okar-chansen-for-mjuklandning/ BIS Bulletin  |  No 59  |  14 July 2022 https://www.bis.org/publ/bisbull59.htm The End of the Beginning After German troops were defeated in a pivotal battle at El Alamein in 1942, he commented that it was “not the end, not even the beginning of the end but, possibly, the end of the beginning.”  The rally in stocks has now gone on for four consecutive weeks, and more than half of the fall in the...

 ... where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned  In its annual report, the BIS said these transitions to high-inflation environments happened rarely, but were very hard to reverse. Chris Giles FT 26 June 2022 https://www.ft.com/content/b937e023-c86c-4b07-b40d-a3266d84f149 BIS Annual Economic Report 2022 https://www.bis.org/publ/arpdf/ar2022e.htm BIS Annual Economic Report 2021  https://www.bis.org/publ/arpdf/ar2021e.htm

That’s the key takeaway from a noteworthy speech by Agustín Carstens, general manager of the Bank for International Settlements. The financial crisis was rooted in the assumption that markets are largely self-correcting, and individual firms and sectors could collapse without consequences for the broader financial system. The return of inflation was almost universally unexpected, including by the BIS.  Second, the return of inflation, while most pronounced in the U.S., is global.  Whether we are now shifting from a low-inflation environment to a high-inflation environment is the biggest question facing central banks.  Greg Ip WSJ 6 April 2022  https://www.wsj.com/articles/what-the-2008-financial-crisis-tells-us-about-todays-inflation-surge-11649263077 The return of inflation Speech by Agustín Carstens, General Manager of the BIS at the International Center for Monetary and Banking Studies, Geneva, 5 April 2022. https://www.bis.org/speeches/sp220405.htm Interest rates...

the broadest rally for more than two decades and reviving economists’ concerns over potential threats to financial stability. Claudio Borio, head of the monetary and economic department at the Bank for International Settlements Is it a bubble? FT 1 August 2021 https://www.ft.com/content/491a245d-4af7-4cad-b860-6ba51b86b45f  

The US housing index (FHFA) is rising at a record pace of 15.7pc.  BIS warns that markets could take matters into their own hands and pre-empt the Fed if there is an inflation overshoot, leading to a “rapid and disorderly unwinding of positions taken on the assumption of persistently easy monetary conditions”.  That is a euphemism for a stock market crash. Ambrose Evans-Pritchard Telegraph 1 July 2021 https://www.telegraph.co.uk/business/2021/07/01/global-reflation-gathering-pace-fed-behind-curve/ BIS Annual Economic Report 2021 - 29 June 2021 https://www.bis.org/publ/arpdf/ar2021e.htm  

Central bankers all acknowledge in private that low rates are like rocket fuel for asset prices; this is considered a key transmission channel for monetary policy.  B ut few will admit in public that they are responsible for this summers stock market surge, either because they do not want to create a "put" for the markets, or get blamed for increasing wealth inequality or become scapegoats if a bubble pops. Or all three. Gillian Tett FT 17 September 2020 https://www.ft.com/content/0216be8d-147a-439f-8f26-db6bc25e4d4c BIS Report https://www.bis.org/publ/qtrpdf/r_qt2009a.pdf

 Real estate sector is a victim of the virus, debt and technological change The Bank for International Settlements, the central bankers’ bank, calculates that in the US, UK, continental Europe and Japan the Covid-19 shock has wiped out Reits’ cumulative valuation gains of the past five years.  John Plender 21 August 2020 https://www.ft.com/content/aaf192ac-dc94-4509-8f24-5831a32e7aa2

Even in good times “liquidity in corporate bond markets appear[ed] less robust” than before, as a report from BIS notes; in bad times, activity might freeze, it was feared. So what actually happened in the Covid-19 market test? The Cassandras were partly right: in early March, the market for corporate bonds did indeed freeze On March 23, the Federal Reserve took dramatic action to halt the freeze in corporate credit, announcing big purchases of company bonds. Gillian Tett FT 29 July 2020

the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets. FT 7 October 2019 BIS committees release two major reports on unconventional policy tools BIS

The Bank for International Settlements said the high-risk loans have climbed to $1.4 trillion and are increasingly being sliced and diced much like subprime mortgage debt before 2007. They are packaged into debt securities known as collateralised loan obligations (CLOs) and mostly sold to unknown funds. Leveraged loans are a form of bank lending to heavily indebted companies with junk credit ratings. Ambrose Evans-Pritchard Telegraph 22 SEPTEMBER 2019    BIS Report

and the trade-off from asset booms is becoming ever harder to justify. The report says the world has been “unable to jettison its debt-dependent growth model”  Ambrose 30 June 2019 BIS Annual Report

“It ­reminds me of what happened in 2008 to 2009 when European banks were ­financing long-term assets in the US with short-term dollar debt. They had a huge liquidity problem. This time the trouble is in Asia, and I am afraid that Asian banks might have to sell a lot of assets in fire-sale conditions.” T he Fed saved the day in 2008 by ­extending emergency dollar liquidity to fellow central banks through swap lines. “It is not clear whether Trump and Congress would let the Fed do that again,”  https://www.telegraph.co.uk/business/2019/05/23/fed-warns-will-not-ride-rescue-wall-street/

https://www.bloomberg.com/news/articles/2018-07-30/emerging-market-dollar-credit-binge-extends-to-3-7-trillion https://www.bis.org/statistics/gli1807.htm

  the insidious illusion of permanent liquidity has not gone away.  insidious = proceeding in a gradual, subtle way, but with very harmful effects. Agustín Carstens, general manager of BIS, FT 25 June 2018

Banks may be disguising their borrowings in a way similar to that used by Lehman Brothers Holdings Inc., with debt ratios falling within limits imposed by regulators just four times a year. Lenders use repurchase agreements -- known as repos -- to massage down their assets as reporting dates approach, typically as quarters end, the Bank for International Settlements said in its Annual Economic Report. Bloomberg 24 June 2018