Dear,
Expansionary cycles of low interest rates and liquidity injections have the tendency of inflating economic bubbles. As the bubble inflates, positive perception of the investors keeps interest rates low, increasing leverage and rising markets valuation.
Even when the spreads rise, ending the expansionary cycle, we don’t know how big the bubble is, we only will when the correction is complete, and the process can take months, even years.
It happened before and it will happen again.
Remember that the subprime crisis started on February 2007 and we were not aware of its severity till September 2008.
We saw a couple of weeks ago, that some emerging economies have started the correction, as a consequence of the different perception on the interest rates evolution, triggered by US FED tapering.
http://sapbank.blogspot.com/2014/02/subprime-crisis-20.html
As in 2007, the general perception is that this is not that serious, US economy is performing well, and the Chinese real estate crisis is far from here.
Be careful with that feeling, don´t forget we’re in a globalized economy, in the middle of a systemic crisis; consequently what happens to one affects the system.
Different economies make the crisis take different shapes, but the root cause is common, Capital Scarcity; and the solution has to be also global and coordinated.
Let’s look now at the symptoms in the developed economies.
A very interesting one is the total Margin debt level, which hit a historical record of $451B last January
http://video.foxbusiness.com/v/3323760203001/margin-debt-levels-hit-record-451b-in-january/#sp=show-clips
For those of you who are not familiar with the term, Margin Debt is the dollar value of securities purchased on margin within an account, and it’s a clear indicator of leverage levels and investors feelings. As the investors have positive feelings about the market evolution, they increase their leverage, buying securities at margin.
If the market perception changes, for instance, triggered by a rise of the interest rates, this huge margin debt will become a very large number of margin calls coming due, increasing the selling pressure and bursting the bubble.
2008 subprime crisis was inflated by a long period of low interest rates; when the bubble burst, and with the intention of avoiding a global depression, Central Banks reduced interest rates, and injected huge amounts of liquidity in the Financial System.
Injecting liquidity for avoiding a depression is an old solution which worked in the past, when capital was abundant.
Unfortunately, today we are in a new era of capital scarcity; a new era coming with new challenges, which require new strategies. In a capital scarce environment, injecting liquidity for preventing a depression, triggered by a debt crisis, it just makes the debt crisis bigger.
Someday we´ll see, that what Central Banks have done during the last five years, is trying to avoid a global fire with gasoline.
Last five years liquidity injections have delayed the depression and inflated a new bubble.
When the new bubble bursts, it will be visible that capital is very scarce, even more scarce than five years ago.
The only alternative is building a new Financial System, with the priority of making efficient use of Capital, but transforming the Financial System is a herculean effort, and that´s why we are in a systemic crisis.
Looking forward to read your opinions.
K. Regards,
Ferran.
Expansionary cycles of low interest rates and liquidity injections have the tendency of inflating economic bubbles. As the bubble inflates, positive perception of the investors keeps interest rates low, increasing leverage and rising markets valuation.
Even when the spreads rise, ending the expansionary cycle, we don’t know how big the bubble is, we only will when the correction is complete, and the process can take months, even years.
It happened before and it will happen again.
Remember that the subprime crisis started on February 2007 and we were not aware of its severity till September 2008.
We saw a couple of weeks ago, that some emerging economies have started the correction, as a consequence of the different perception on the interest rates evolution, triggered by US FED tapering.
http://sapbank.blogspot.com/2014/02/subprime-crisis-20.html
As in 2007, the general perception is that this is not that serious, US economy is performing well, and the Chinese real estate crisis is far from here.
Be careful with that feeling, don´t forget we’re in a globalized economy, in the middle of a systemic crisis; consequently what happens to one affects the system.
Different economies make the crisis take different shapes, but the root cause is common, Capital Scarcity; and the solution has to be also global and coordinated.
Let’s look now at the symptoms in the developed economies.
A very interesting one is the total Margin debt level, which hit a historical record of $451B last January
http://video.foxbusiness.com/v/3323760203001/margin-debt-levels-hit-record-451b-in-january/#sp=show-clips
For those of you who are not familiar with the term, Margin Debt is the dollar value of securities purchased on margin within an account, and it’s a clear indicator of leverage levels and investors feelings. As the investors have positive feelings about the market evolution, they increase their leverage, buying securities at margin.
If the market perception changes, for instance, triggered by a rise of the interest rates, this huge margin debt will become a very large number of margin calls coming due, increasing the selling pressure and bursting the bubble.
2008 subprime crisis was inflated by a long period of low interest rates; when the bubble burst, and with the intention of avoiding a global depression, Central Banks reduced interest rates, and injected huge amounts of liquidity in the Financial System.
Injecting liquidity for avoiding a depression is an old solution which worked in the past, when capital was abundant.
Unfortunately, today we are in a new era of capital scarcity; a new era coming with new challenges, which require new strategies. In a capital scarce environment, injecting liquidity for preventing a depression, triggered by a debt crisis, it just makes the debt crisis bigger.
Someday we´ll see, that what Central Banks have done during the last five years, is trying to avoid a global fire with gasoline.
Last five years liquidity injections have delayed the depression and inflated a new bubble.
When the new bubble bursts, it will be visible that capital is very scarce, even more scarce than five years ago.
The only alternative is building a new Financial System, with the priority of making efficient use of Capital, but transforming the Financial System is a herculean effort, and that´s why we are in a systemic crisis.
Looking forward to read your opinions.
K. Regards,
Ferran.
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