Bank of International Settlements

On a day when equity markets took another tumble, the Bank of International Settlements once again makes the headlines warning of impending disasters in the capital markets. On more than one occasion during the summer they have warned that debt levels are too high, valuations are stretched and to quote the Telegraph on Wednesday "markets are at risk of blowing up". Their comments are not only related to equities but risk assets in general. 

The head of BIS's market committee claims that investors are far too complacent, wrongly believing that central banks will protect them. We would argue he is wrong, investors are far from complacent, excessive cash levels relative to history are a testament to that, what they are is fearful of all asset classes but unsure which one to be most afraid of.

It may well be whatever one does you face a Hobson's choice in the coming years as your capital will face a threat, it just depends which way it happens. If you leave your money in the bank and forgo any income, you resort to live off your capital. That can only go on for so long as anyone who tried it will testify to. On the other end of the scale, you invest in the equity market, your capital is at risk but you earn an income that may reduce your need to dip into your capital in the short term. Over time as has been the case in history so does the economy recover and along with the equity. Invest in the bond market as a compromise, you get some income and may erode your capital less quickly, but in the indebted world we live it cannot be considered risk free. The answer as always is a balance between risk and reward, one does not put all of your eggs in one basket but tries to blend the investment strategy to meet ones needs as best as one can. Perhaps that would be a good message for the BIS to promote.

 

When the BIS makes these apocalyptic statements, one understands the aim is to ensure they warn people of the dangers of excessive risk taking, but beyond that what does it achieve. Are these comments aimed at the man in the street? In which case there comments can become self-fulfilling prophecies and they can claim I told you so. If they are aimed at the central bankers of the world        (most likely), in which case they need to make a credible case for alternative measures that will stimulate global growth. The World Bank and the IMF stressed at the end of last weekend, economic growth is fundamental along with avoiding the perils of deflation. That means whether the BIS like it or not low interest rates are probably here to stay for a while yet, and if the risk of deflation takes hold even more they may go lower. One would suggest the IMF and the BIS should provide a united message, as the common goal to avoid a repeat of 2007 must be the aim of both parties.

 

Posted on October 15, 2014 .