- REUTERS/Alex Grimm
- Bank for International Settlements warns of possible “long-run turbulence” in the global economy.
- The “central bankers’ central bank” argues that investors are ignoring inflated asset prices because of the strong global economic picture right now.
- The warnings echo those of the Bank of England, and star fund manager Neil Woodford.
The global financial system is showing worrying echoes of the years leading up to 2008’s global financial crisis, and central banks must act to prevent major damage, according to the Bank for International Settlements has said.
The BIS – often known as the “central bankers’ central bank” – warned in its quarterly report of potential “long-run turbulence” and said it has concerns about the potential for overheating global financial markets.
It also warned that consumer debts are starting to reach unhealthy levels in many countries around the world.
“The vulnerabilities that have built around the globe during the unusually long period of unusually low interest rates have not gone away,” said BIS chief Claudio Borio.
“High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations, in turn underpinned by low government bond yields – the benchmark for the pricing of all assets.”
“What’s more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence,” Borio said.
Essentially, Borio and the rest of the organisation are worried that the current strong, low volatility global market and economic environment is encouraging investors to ignore fears about high levels of debt and overvalued financial assets.
On the consumer debt side, the bank’s words echo those of the Bank of England, which has consistently argued that debt levels in the UK are worryingly high.
Warnings from BIS add to a growing chorus of negative sentiment about bubble-like patterns in the global economy.
Last week, Neil Woodford – the UK’s best-known fund manager – argued stock markets around the world are in a “bubble” which could result in one of the worst market crashes in history.
“Whether it’s bitcoin going through $10,000, European junk bonds yielding less than US Treasuries, historic low levels of volatility or triple-leveraged exchange traded funds attracting gigantic inflows – there are so many lights flashing red that I am losing count,” Woodford said in the Financial Times.
He said current equity valuations represent a bubble the likes of which he had “only witnessed two or three times in my career as an investor.”