"There are a number of things you don't want to hear a central banker say," says MoneyWeek contributor Tim Price in a Price Value Partners report. "One of those just popped out of Janet Yellen's mouth." The chair of the US Federal Reserve has just said she doesn't think any more financial crises will occur in her lifetime.
This remark "has to be up there" with Irving Fisher's "deathless observation" just before the 1929 stockmarket crash that equities had reached "what looks like a permanently high plateau". Talk about tempting fate, agrees Randall Forsyth in Barron's, especially since, in central-banking terms, Yellen is a spring chicken. She's only 70, while her predecessors Alan Greenspan and Paul Volcker are 91 and 89 respectively.
We may not have to wait all that long for a crisis, says Ambrose Evans-Pritchard in The Daily Telegraph. The backdrop looks even more precarious than before the last meltdown. Back then, global debt had reached 276% of GDP. Today it's up to 327%, as the Bank of International Settlements pointed out last week. Credit growth is rampant in China, which along with other parts of the emerging world is leveraging up "with gusto".
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There are plenty of other signs of froth. Global government bonds, underpinned by trillions of central banks' printed money, are absurdly overpriced. Lending standards have slipped, too, notes the Buttonwood columnist in The Economist. In the EMEA region (Europe, the Middle East and Africa), the proportion of the loan market that is covenant-lite (accompanied by few safeguards against a deterioration in the debtor's business) has reached 66%. That's up from 27% in 2015. US stocks have only been pricier on two occasions: before the collapses of 2000 and 1929.
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Serial defaulter Argentina has just issued a 100-year bond. "There is leverage all over the place and the system is as lethal as ever," according to Marc Ostwald of ADM Investor Services. All this debt means the world economy is more sensitive than ever before to dearer money. And monetary policy cannot stay loose forever. What happens when the money taps are turned off (see below)?The problem, as Evans-Pritchard says, is we "have run out of road". Central banks, having responded to every previous bust by cutting interest rates, and creating a huge bubble by printing money, have nowhere left to go. Real rates can hardly get more negative, and printing yet more money will do little to solve another crisis. We'd just better hope Yellen is right, since she is not in a position to do anything about it if she is wrong.
Taper tantrum: the sequel
Investors may be jumping the gun. There is little sign of inflation making a significant comeback in the eurozone, while the Bank of Japan has reaffirmed its commitment to keeping the ten-year bond yield at 0%. QE is certainly unlikely to end until well into next year. But since the markets and the broader economy are kept aloft by central banks, the issue is whether they can cope with the liquidity withdrawal. "Rapid weakness in bond prices that drives yields higher and sparks disorderly markets for risk assets would start choking the broader economy," says Michael Mackenzie in the Financial Times.
This creates scope for "a game of chicken between central banks and markets", says the Buttonwood columnist in The Economist. Investors know central banks will want to move very slowly to avoid a downturn or a crisis, and reckon that policy will be loosened again at the first sign of trouble. In which case, they may anticipate this by continuing to lend or buy, blowing the bubbles up more and painting us all further into a corner.
