There are three certainties in life: death, the tax burden, and warnings from the BIS – the central bank of central banks – about the excesses of too loose a monetary policy. Actually, we can add one more to that list: Central banks flatly ignore the warnings of the central bank parent.
The most recent example of this was seen last October, when the Fed announced the launch of its QE4 program – one day after the BIS warned of the effects of quantitative easing.
To be sure, that doesn’t stop the Bank for International Settlements (BIS) from continuing its reminders, and that’s exactly what the Basel-based organization did Monday when it warned in its latest quarterly report that the upswing in financial markets following the COVID-19 vaccine breakthrough and the U.S. election has led to increasing exaggerations in stock markets.
Exaggerated stock market valuations – as before the Corona crisis
Monday’s BIS Quarterly Report noted that credit markets and some of the world’s largest equity markets have already surpassed their pre-pandemic levels, despite the significant degree of uncertainty that remains about the pandemic as it continues to spread.
Claudio Borio, head of the BIS’s Monetary and Economic Department, said a rally had been justified by the vaccine news and ongoing fiscal and monetary stimulus, but there were also signs of overshooting.
“There still appears to be some disconnect between the valuation of risky securities and the economic outlook,” Borio said diplomatically in his latest warning regarding the state of disconnect between markets and equities, adding that “questions about stretched valuations” existed before the coronavirus crisis.
Focus on the corporate sector
While the BIS’s remarks are frequently observed and discussed by economists when the world’s leading central bankers attend their behind-closed-doors meetings, they are generally ignored. However, they are then generally ignored. For while the BIS has preached a return to monetary orthodoxy over the past decade, this is no longer possible for central banks that have boldly entered the global Minsky moment with helicopter money in tow.
In any case, Borio said that one of the developments he was particularly wary of was the rapid easing in corporate credit markets, which recently culminated in record low yields on junk bonds – this seems like a paradox at first, given that corporate debt reached record highs, but given the Fed’s withdrawal from the entire corporate bond market, it is perfectly understandable.
“We are moving from the liquidity to the solvency phase of the crisis.”
And in a dire warning that nevertheless drew little response, Borio made the following startling announcement to reporters. “We are moving from the liquidity phase to the solvency phase of the crisis.”
Increasing cash might mitigate liquidity risks, he said, but that does little to alleviate the burdens of higher debt service, a major contributor to solvency problems. Companies would become more vulnerable in this way if demand weakened or financial shocks occurred.
“We should expect more bankruptcies in the future, but credit spreads are quite low by historical standards, and while banks are grading risk more carefully, we don’t see the same in the capital markets.”
One almost sensed the futility of Borio’s comments when he added that with $17.5 trillion worth of bonds now showing negative yields, many money managers are being pushed into increasingly risky assets.
So who is advising central banks on their decisions?
Of course, Borio would not bring himself to admit that the very central banks he is supposed to “advise” are ignoring his warnings and recommendations – and instead flooding the market with trillions in stimulus that does not flow into the economy but merely makes wealth holders richer than they could ever have imagined in their wildest dreams, because that would mean that someone – and clearly not the BIS – is now responsible for advising central banks on monetary and economic policy.
It would also mean that the BIS would no longer be relevant, being eclipsed and disregarded by its constituent members.
Perhaps Borio and his BIS colleagues can write a detailed report for his next quarterly report on who or what now controls global monetary policy, since the BIS track record is limited to merely issuing warning after warning on a quarterly basis, the ignorance of which, moreover, is now openly displayed on all sides.
Support without alternatives
In his concluding remarks on the absolution of the helicopter money craze that has taken over, Borio had no choice but to admit that – despite his misgivings – he must side with the central banks:
“The outlook is quite uncertain, and one is more likely to side with those who do too much than with those who do too little.”
There remains a choice between a rock and a hard place. So the situation is likely to get worse as central banks, ignoring all warnings, continue to pursue the same failed policies of the past, driving debt to even more record highs and yields to even more record lows, and unleashing a proliferation of zombie corporations the likes of which has never been seen before.