“The world has accumulated financial risks like never before in its modern history, and at the same time the markets and the authorities have ignored them”, points out the economist and co-founder of Quantum Talent
“Markets can ignore risks for years until one day they stop doing so, and when that happens they react suddenly and wildly, causing a crisis.” The audience listened to the warning without flinching. Robert Rubin (former US Treasury Secretary and former CEO of Goldman Sachs) spoke to the elite about global high finance – central bankers, multilateral authorities, banking CEO – attending the latest conference on macroeconomic policy at the Peterson Institute , one of the most prestigious think tanks in the economy.
Since the crisis of 2007, the world has accumulated financial risks as never before in its modern history, and at the same time markets and authorities have ignored them as if there had been no crisis in modern history. The events of the last week in the markets have not created alert either, they have been dismissed as a result of temporary corrections.
Ten years of depressed interest rates by central banks have led investors to seek returns in other asset classes, accumulating unprecedented risks. Several classes of highly risky assets have reached historically high valuation levels, which can hardly be explained for reasons other than the distortions of monetary policy.
The stock market for example reached record levels without a clear explanation for fundamentals in the real economy. Recently the S & P 500 was 70% above the highest level reached pre-crisis 2007 (which in turn was similar to the level reached pre-pop of the dot-com bubble).
The market for private equity fund acquisitions also reached a record. The wave of transactions was driven by the ease of borrowing at very low rates and in more flexible terms than ever before. The “Financial Times” reports that terms that in other times were considered indispensable, such as covenants that restrict additional leverage and require maintaining a senior position in the company’s debt structure, have been gradually forgotten, to the point where the loans ” covenant light “today represent 70% of loans for leveraged purchases, compared to 30% before the 2007 crisis.
Emerging markets have also been contagious. For the first time since 2007, its participation in global debt portfolios has moved in the opposite direction to the sovereign ratings of the countries. Although the fiscal balances of emerging countries have gradually deteriorated since 2013, emerging debt yields have remained low. As a result, the total amount of sovereign issues without investment grade increased in 2017 by 50%, according to Dealogic.
The enormous distortion created by quantitative facilitation is the best explanation for this anomalous behavior. At the same conference, Ben Bernanke admitted that “quantitative facilitation works very well in practice, but not in theory.” It means that no one knows what the effects of having flooded the world with cheap money can be for so long. Rubin’s warning is more pertinent than ever. There are very difficult and uncertain times and Peru has done little to navigate them successfully.