The financial crisis can was just kicked forward. At any moment it will roll back on us, with vengeance.

Sir, Raghuram Rajan, though indicating problems, writes: “The world economy has finally managed to recover from the financial crisis” “Bond markets send signals of a looming recession” June 29.

Sir, on the surface the signs of a recovery are there but, under the surface there are huge build-ups of asset values, shares and house prices, and of personal, public and corporate debt, that herald difficult times.

In August 2006, when trouble was already in the air, you published my letter titled “The long term benefits of a hard landing”. Clearly nothing of what I there argued was considered.

With QEs, Tarps, Asset Purchase programs, fiscal deficits, low interest rates and the keeping of much of the insane low capital requirements for banks, the crisis can was just pushed forward. 

Add to that Eurozone, China, Brexit, robots grabbing jobs, trade wars, migrant issues and so many unresolved problems, and one can perhaps begin to understand a not to be named reason for how so many want to legalize the use of marihuana.

Sir, again, much of the current mess is directly produced by the frantic efforts of regulators and central bankers to hide their responsibility in causing the 2007-08 crisis and ensuing hardships.

For God’s sake! In Greece they are hauling in front of courts a statistician for telling the truth, while those that with their absurd and irresponsible 0% risk weighing of that nation doomed it to excessive public debt, are free to roam and lecture us about good economics. 

@PerKurowski

Low interest rates cause buy-backs, meaning less equity controlling assets and higher leverages. How will it play out?

Sir, you write: “the relationship between rates and the valuations of assets such as stocks is not simple. Ironically, if there is a bubble in stocks right now, excessive faith in and misunderstanding of the power of low rates might be a contributing factor. Central bankers keen to avoid crashes might explain this more clearly.” “Central bankers cannot blow bubbles alone” May 6.

In a sort of veiled way, IMF in its Global Financial Stability Report’s, “Where Are the U.S. Corporate Sector’s Vulnerabilities?” reports on this, when it states:

“The corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010. Bank lending to the corporate sector has continued to recover and could well rise further in response to more favorable market valuations. In contrast, equity finance has traditionally been outstripped by share buybacks and has recently leveled off. A drop in the cost of equity capital may stimulate equity financing, but it could coincide with higher corporate debt—particularly if additional share buybacks are financed through debt.”

That begs three questions:

First: How much of the recent increase in the stock markets is the result of buybacks; that which helps earnings per share to get a sort of artificial boost; that which results in less equity controlling the corporations?

Second: Do the recent stock-market prices increases duly reflect the increase riskiness derived from much higher corporate debts? 

Third: Have Central Banks therefore, with their low interests rate policies, dangerously lowered the capital (equity) requirements of corporations?

On the first two questions I have no answers, though just having to ask them should suffice to at least raise some eyebrows.

On the third the IMF seems to clearly respond, “Yes!” when on that same page, under the subtitle “High Leverage Combined with Tighter Borrowing Conditions Could Affect Financial Stability” it writes:

“As leverage has risen, so too has the proportion of income devoted to debt servicing, notwithstanding low benchmark borrowing costs. Although the absolute level of debt servicing as a proportion of income is low relative to what it was during the global financial crisis, the 4 percentage point rise has brought it to its highest level since 2010, which leaves firms vulnerable to tighter borrowing conditions. The average interest coverage ratio—a measure of the ability for current earnings to cover interest expenses— has fallen sharply over the past two years. Earnings have dropped to less than six times interest expense, close to the weakest multiple since the onset of the global financial crisis.”

Holy Moly! And interest rates have not yet returned to something more "normal"; and the Fed's balance sheet is still so huge it leaves little space for any future QE assistance...and not to speak of the already too large public debts. 

How will this all play out? I don’t know. Perhaps I’d better, like most, stick my head in the sand.

@PerKurowski

Do the bells toll and if so for whom?

Sir, Martin Wolf titles “Why fairly valued stock markets are an opportunity”, November 26, and who would argue with that? It gets much thorny though when figuring out what “fairly priced” really means and for whom the opportunities exists.

Wolf has a go at answering whether the bells really do toll by using a fundamental variable like the market value to the net assets value at replacement cost, though analyzing it mostly as a chartist looking for important inflection points. Anyone who believes or wants to believe that the market is now fairly valued will indeed find some comfort.

Now for whom does the bell toll? The young? Should they buy the shares from the baby-boomers at this level in order to build their own nest for the future or should they better wait? Not a clear call but it sure looks like it will be a horrible battle between the generations.

Should the government, given its deep pocket and the time horizon that is needed buy shares? I think better not. A government, especially when its finances are tight and it will anyhow have to bail-out many baby-boomers in the real world, should concentrate on assisting the birth of the new rather than saving the value of the old, and this even when some advisers guarantee it there are great profits to be made… when buying shares from them.