May 23, 2017

Current bank swimwear does not stop some to be caught swimming naked when the tide goes out, just the contrary.

Sir, Mohamed El-Erian ends his discussion of “the challenge facing those looking to generate high risk-adjusted returns.”, citing Warren Buffett’s observation that “only when the tide goes out do you discover who’s been swimming naked”. “How the great bull run can have a constructive end” May 23.

We already know a couple of those who will be caught swimming naked.

Sovereigns building up debt assisted by QEs, low interest rates and regulations that forces public debt down the throat of banks and insurance companies.

Corporations, because of low interests rates taking on high levels debt in order pay dividends and buy back shares.

Millennials and those following them believing there is something real out there that will take care of their older days.

Students who took on debt based on illusions about finding a good full-time job, those that are disappearing by the second.

How has all this happened? Regulators said “We have risk-weighted the oceans so there are no more tides.”… and the whole world believed their mumbo-jumbo.

But on the contrary, the risk weighted capital requirements for banks which distorted the allocation of bank credit to the real economy, helps only to guarantee that the tides will be stronger and more destructive than ever.

I swear, bad-luck weighted capital requirements for banks would take care much better of the real dangers, namely the unexpected.

PS. Here are some interesting questions to ask regulators, but only for those who would dare to hear the answers.