One of Australia's most senior bankers believes global financial markets may face a "meaningful" correction similar to the 1994 bond crash, because aggressive monetary stimulus is inflating asset bubbles.
Rob Whitfield, the chief executive of Westpac's institutional bank, on Thursday warned that bubbles were forming as global investors took on more risk in search of higher returns.
But he stressed that this did not mean the world faced another global financial crisis, because key vulnerabilities had been addressed and banks and economies were more able to cope with shocks.
Speaking in Tianjin, China, Mr Whitfield said central bank moves to stimulate growth had created "a wall of liquidity," which had in turn triggered a global hunt for yield reminiscent of conditions before the 1994 bond crash.
"I predict a future market correction; perhaps even a meaningful one," he said in an organised debate with other executives and experts at the World Economic Forum.
"Credit spreads are narrow, forcing a move by many into higher risk assets - junk bond yields are at all-time lows. Asset bubbles are emerging - US share markets have posted successive record highs in recent times despite tapering and mixed economic results.
"It is my view that the current environment is ripe for a market correction that both looks and feels like what we experienced in 1994."
In the 1994 bond crash, US Treasury bond yields surged suddenly after being pushed down by recession and low inflation. Bond yields and prices move inversely.
When the US Federal Reserve responded by raising rates, yields on bonds around the world jumped, pushing up borrowing costs. If this occurred today, there is a risk it could damage the global economy.
Mr Whitfield highlighted the similarities between conditions today and those of 1994.
Historically, he said asset bubbles had "largely arisen during periods of ultra-accommodative monetary policy, combined with sustained periods of low interest rates and an ever-increasing supply of money - sound familiar?"
Shit! This is getting beyond a joke. I thought I was a bear, is there any leading Australian financial figure left that hasn't come out in the last few weeks with a message of doom and gloom?
Something big is in the making I recon and all these blokes want clean hands when it occurs.
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
Shit! This is getting beyond a joke. I thought I was a bear, is there any leading Australian financial figure left that hasn't come out in the last few weeks with a message of doom and gloom?
Something big is in the making I recon and all these blokes want clean hands when it occurs.
Can't see any ill effects from 1994.
But! will now be different? Who owns lots of bonds, and what effect will this have on them?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
Shit! This is getting beyond a joke. I thought I was a bear, is there any leading Australian financial figure left that hasn't come out in the last few weeks with a message of doom and gloom?
Something big is in the making I recon and all these blokes want clean hands when it occurs.
Almost everyone of some weight has put out a statement to cover their ass by now.
The next step is to abandon your post
Let me assure you that this isn't one of those shady pyramid schemes that you've been hearing about. No sir, our model is the Trapezoid which guarantees each investor an 800% return within hours. Those who can, do. Those who can't, teach. "It's an itchy blanket, it's designed to remind you how lucky you are"
Who owns lots of bonds, and what effect will this have on them?
Well there are bonds and there are bonds, I guess for the average Australian the major bond exposure would be the nuvo bank bonds, rebadged mortgages, that I have no doubt have been stuffed into average super accounts. No doubt somewhere in the backrooms of the big 4 sit actuaries who sort the mortgages and there's a shute to the bond room that they stuff all the crappy investor IO loans into.
As for the big boy treasury bonds, perhaps the banker is alluding to the trillions of QE bonds that have been manufactured since the GFC. Every nation's government has been printing like mad with no plan (or hope) of ever buying them back ( from whoever actually holds them)
I think the governments themselves have been buying them off each other, essentially swapping them net net and then using them to buy oil off the Saudi's etc
vdmruss
12 Sep 2014, 03:29 PM
The next step is to abandon your post
I aways believed that the US system would collapse under Obamas watch, for historical reasons. Still possible.
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