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The Next Time The BIS Wants To Warn About Monetary Kool-Aid, Bubbles, Lack Of Liquidity Or Complacency...

Tyler Durden's picture




 

We have a modest proposal to the Bank of International Settlements, aka the "central banks' central bank": the next time you feel like warning the general public about monetary Kool-Aid such as:

"low volatility everywhere" or that asset prices are at "elevated" levels

... as you did just 6 weeks ago, or that:

"it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally", that "despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions" and that "the temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere"

... as you cautioned in June 2014, or, best of all, musing whether:

"central banks [can] now really do “whatever it takes”? As each day goes by, it seems less and less likely... [seven] years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy"

... as you said in June 2013, perhaps you should discuss these asset-bubble, complacency, volatility-crushing, impotent-central banking concerns with its Board of Directors first?

 

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Fri, 10/31/2014 - 14:07 | 5399128 Dr. Engali
Dr. Engali's picture

Uhhhmmmm..... It's the debt stupid.

Fri, 10/31/2014 - 14:09 | 5399135 malek
malek's picture

Nah, can't be because that word doesn't exist in Paul Krugman's vocabulary.

Fri, 10/31/2014 - 14:22 | 5399178 Bluntly Put
Bluntly Put's picture

We should all don the robes and become Krugmanites, and realize that debt is never a liability for large organizations. It can only be an asset for governments or large corporations and banks, never a liability.

Individuals who must service this debt all on their own (and all debt is ultimately serviced by individuals as corps pass on their costs) will be fine if they just continue to buy more stuff they don't need with money they don't have (credit).

.

Fri, 10/31/2014 - 14:34 | 5399222 ZerOhead
ZerOhead's picture

The BIS is definitely up to no good

When you have a room full of currency molesters collectively critical of their own actions you know they are probably attempting to hedge themselves in order to maintain control when the shit hits the fan.

Or perhaps the vomit in the case of a global ebola pandemic...

Fri, 10/31/2014 - 14:32 | 5399228 ShorTed
ShorTed's picture

Which, "...stupid"? 

Fri, 10/31/2014 - 14:47 | 5399298 Bloppy
Bloppy's picture

They're shocked to hear gambling's going on inside their establishment!

 

Elsewhere: panicked Dems resort to Big Brother tactics to browbeat their supporters to the polls. Will it backfire?

http://tinyurl.com/mrnpd66

Fri, 10/31/2014 - 14:11 | 5399141 WTFRLY
WTFRLY's picture

Facebook to mine, sell user data on political issues to ABC, clickbait distraction site Buzzfeed

http://wtfrly.com/2014/10/31/facebook-mine-sell-user-data-political-issu...

Fri, 10/31/2014 - 14:27 | 5399199 Bioscale
Bioscale's picture

I'm shocked and disgusted. /s

Fri, 10/31/2014 - 15:00 | 5399361 TeethVillage88s
TeethVillage88s's picture

Facebook maybe Mining the wrong data....

- Federal Government Made $20 Billion in Secret Purchases in Recent Months
- I-Team review finds $30,000 in one agency’s Starbucks purchases kept confidential from public

http://www.nbcwashington.com/investigations/Federal-Government-Made-20-B...

Facebook & Google could do a real public service by Mining Government Data, Government Audits, Government Inspections, and Government Spending...

Fri, 10/31/2014 - 14:11 | 5399144 SheepDog-One
SheepDog-One's picture

Or instead of asking central banksters to fly right, lets just roll out some guillotines and lop off their heads. I think more of a point would be made.

Fri, 10/31/2014 - 14:20 | 5399170 Market Rage
Market Rage's picture

What can I do to help out?

Fri, 10/31/2014 - 14:16 | 5399163 Jack Sheet
Jack Sheet's picture

It's all because Tim Cook has come out 

Fri, 10/31/2014 - 14:18 | 5399165 Wait What
Wait What's picture

right hand, meet left hand. don't worry abt what it's doing, that's just a kitchen knife pointed at you, nothing to worry abt.

Fri, 10/31/2014 - 14:26 | 5399196 Cognitive Dissonance
Cognitive Dissonance's picture

Survival lesson #1: Ignore what they say, watch what they do.

Fri, 10/31/2014 - 14:33 | 5399229 Livermore Legend
Livermore Legend's picture

".....Ignore what they say, watch what they do....."

'Nuff Said'.

Fri, 10/31/2014 - 15:26 | 5399461 ThirdWorldDude
ThirdWorldDude's picture

I live by that motto CD.

Res, non verba!

Fri, 10/31/2014 - 14:26 | 5399198 economists_do_i...
economists_do_it_with_models's picture

Speaking of chart patterns...  The recent S&P500 parabolic move into a gap-up new top NOT confirmed by RSI has to be viewed as questionable if not down right negative/exhaustive.

Fri, 10/31/2014 - 15:27 | 5399460 Kirk2NCC1701
Kirk2NCC1701's picture

Ah, BIS: The "Bosses In Switzerland"... "worried"? Really?

Fri, 10/31/2014 - 16:01 | 5399577 polo007
polo007's picture

According to Natixis FICC Research:

http://personal.crocodoc.com/SU8Hy8u

In reality, central banks control only the prices of the assets they buy directly

When a central bank buys an asset directly (often government bonds), it drives up the price of this asset, the demand for which increases.

But the prices of the other asset classes increase only if the economic agents that have sold the first assets to the central bank use the money received to buy these other asset classes.

This transmission of increases in asset prices to all asset classes is therefore unstable, since it depends on the behaviour of investors and savers. Since 2012, we have seen that central banks’ purchases first led asset sellers to buy risky assets (equities, corporate bonds), whose prices rose. But in the recent period, the rise in risk aversion has turned them away from risky assets, whose prices have fallen, and they have invested the money received from the central bank in risk-free assets.

There is therefore no stable monetary policy "risk channel"; the only asset prices that are controlled by central banks in the longer run are those of the assets that central banks buy directly. This could in the future push central banks to buy riskier assets if they want to change their prices in a stable manner.

Central banks’ asset purchases have a direct impact on the prices of these assets

When a central bank buys financial assets, it increases demand for these assets, which directly drives up their prices.

This occurred with purchases of Treasuries and ABS in the United States (Charts 1A and B) and with government bonds in the United Kingdom and Japan (Charts 2A and B), and with the announcement of covered bond purchases in the euro zone (Chart 3).

But the impact of the central bank’s asset purchases on other asset classes is uncertain

- The central bank buys assets (especially government bonds, Charts 1A, 2A and B above).

- It pays by creating money (Chart 4).

- The economic agents that sell assets to the central bank use this money to buy other assets. But they have a free choice: a quantitative easing policy will drive up the prices of the assets that economic agents choose to buy, not the prices of the others.

- We also saw from 2011-2012 until the spring of 2014:

• A tightening of credit spreads (Charts 5A and B, 6A and B);

• A rise in the stock market (Charts 7A and B, 8A and B).

- But investors’ risk aversion has risen since the spring of 2014, (Charts 9A and B): they no longer buy risky assets and the prices of these assets have corrected downwards, whereas long-term interest rates on risk-free government bonds have fallen sharply (Chart 3 above, Charts 10A and B).

Conclusion: The risk channel is not robust

The transmission of the rise in the prices of the assets the central bank buys directly to a rise in the prices of other assets is therefore unstable, since it depends on investors’ attitude and their risk aversion.

The "risk channel" is the mechanism through which the central bank’s monetary creation drives down risk premia.

We have seen that this mechanism is unstable: it functions only if economic agents use the money created by the central bank, in exchange for purchases of risk-free assets, to buy risky assets.

If their risk aversion rises, this mechanism disappears - and so does the risk channel. In that case, the only remaining possibility for the central bank is to buy risky assets directly if it wants to drive down their prices.

Fri, 10/31/2014 - 22:21 | 5400607 Ned Zeppelin
Ned Zeppelin's picture

All bullshit
" hey we warned y'all , after all."
Puh-leze

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