It makes you wonder when the IMF (Interntional Monetary Fund) worries about individual investors selling stocks because of values “deteriorating unexpectedly”.Do they know something that we don’t? Is this a signal that the market is going to crash? The following article written by the IMF indicates they are very concerned about the effect of ending QE; predicting that stock prices will go down, which will trigger a panic and huge sell-off, thereby crashing the stock market.
The IMF Says Assets are Overvalued
Worried That The “Taper” Will Deteriorate Asset Prices
An IMF article, Heat Wave: Rising Financial Risks in the United States states, “Six years after the start of the global financial crisis, low interest rates and other central bank policies in the United States remain critical to encourage economic risk-taking—increased consumption by households, and greater willingness to invest and hire by businesses.”
In other words, printing money and keeping interest rates low were designed to get you to invest in risky stocks and take out low-interest rate loans and mortgages. And this money you borrowed was intended to be spent, thereby increasing consumption. But now the IMF is concerned that low interest rates have encouraged people to go into stocks, driving stock prices to overvalued heights.
“However, this prolonged monetary ease also may have encouraged excessive financial risk-taking. Our analysis in the latest Global Financial Stability Report suggests that although economic benefits are becoming more evident, U.S. officials should remain alert to excessive financial risk-taking.”
“Persistently low global interest rates have prompted investors to search for higher returns in a wide range of markets, such as stocks, and investment-grade and high-yield bonds.
This has resulted in escalating asset prices, and enabled issuers to sell assets with a reduced degree of protection for investors…The combined trends of more expensive assets and a weakening quality of issuance could pose risks to stability.” Did I hear “risky assets”?
“The heat map shows that financial risk taking in corporate debt markets is rising and markets have begun to overvalue many assets. Spreads in the high-yield and leveraged loan markets are not far from levels seen before the financial crisis.”
“Meanwhile, the risk that many investors could sell their holdings all at once is now even higher than before the crisis. Mutual funds, exchange traded funds, and households hold about 30 percent of corporate bonds as of the end of June 2014.
The worry is that such “retail” investors [individual investors who buy and sell securities for their personal accounts] could start selling suddenly if the value of their assets deteriorates unexpectedly.”
I’m wondering why they are thinking that stocks will unexpectedly “deteriorate” – forget that ridiculous word (this isn’t a weather report) – what they mean to say is that stock prices will crash!
“For example, high-yield corporate and emerging market bond markets saw large retail outflows in May and June 2013, when investors panicked during the “taper tantrum” episode. That event was relatively short-lived and did not involve institutional investors.” Taper tantrum? Economist Peter Schiff expects taper “convulsions.”
So it is about the “taper”, which is the ending of the 6 years of profligate money printing to the tune of 4 Trillion dollars, (QE, quantitative easing) that is scheduled to end this month, that they are worried about.
“A more severe episode of flight from risk by retail investors could lead to even greater financial volatility with wider systemic repercussions than were suffered during the 2013 event.” In laymen’s terms, that means that if a lot of people take their money out of the stock market, it will crash. And the IMF is already preparing for it. They don’t know exactly HOW they will react to try to fix it, but they are are anticipating a stock market crash.
What to do
“Officials have acknowledged some of these risks, most recently in U.S. Fed Chair Yellen’s testimony to Congress in July in which she noted some potential financial stability effects of sustained unconventional monetary policy.” This means they are worried that the past 6 years of printing 4 trillion dollars may have some negative ramifications. The IMF is realizing it is time to pay the piper.
“While U.S. officials have already taken some measures to restrain excessive risk-taking, for example in the leveraged loan market, we believe more could be done. Macroprudential policies designed to keep the overall financial system safe could be deployed as the first line of defense against rising financial stability risks.
The United States is getting closer to ending six years of policies designed to stave off the worst effects of the crisis. The U.S. banking system is now much more resilient, and economic risk taking by households and corporations is taking hold.
For the sake of a smooth exit and a durable recovery, not only in the United States but globally, it is critical that officials continue to respond to rising financial stability risks.“
So, just what are these “macroprudential policies”? According to the IMF, they are evolving and need to be flexible to include whatever the IMF deems necessary to prevent the collapse of what they consider systemically important banks. In other words, they don’t know what exactly they will do, but they will just try something new and see if it works.
“Macroprudential policy does not seek to replace traditional regulation of financial institutions, such as commercial banks, which are essential to a healthy system. Instead, it adds to and complements microprudential policy.
It can often deploy traditional regulatory tools, and relies on traditional regulators for implementation and enforcement. But it adapts [changes] the use of these tools to counter growing risks in the financial system.
This evolving [making it up as you go along] approach may require a new type of regulatory setup to monitor the financial system for evidence of growing threats to stability and to enable the authorities to take action to counter those threats…it is an approach that is still evolving (FSB/IMF/BIS, 2011).”
Even the IMF realizes that it can do nothing to prevent this coming crash. “Even the best macroprudential policies cannot prevent all financial crises. As a result, there is a need for a strong and flexible lender of last resort—typically a central bank—to ease temporary shortages in liquidity and for credible policies to resolve or close failing financial institutions.” So they expect some banks to fail, and they will decided which ones to save and which ones to close.
If you are somewhat confused, so are the experts. ” Kevin Warsh, former member of the Board of Governors of the Federal Reserve System said it well at the IMF meeting this past weekend: “macro-prudential policies are vital, but we have no idea what they are”.
There is no doubt there will be effects when the taper occurs. As this country has never implemented such a massive money-printing scheme of this magnitude before, we are in uncharted territory. No doubt we shall soon find out if the IMF’s prediction of a crash [deterioration] occurs.
Now that Ebola has been established as the “October surprise”, we may also be in for a “November surprise.” Let’s just hope it’s not both new Ebola cases and a market crash.