Pensioners and retail customers suffering the biggest financial crisis of their lifetimes could be the result of an unruly end to monetary stimulus from global central banks, warned the CEO of a U.K.-based wealth management firm.
Bond markets will be the source of the problem and are primed for a sharp reversal, believes Brian Raven, group chief executive at Tavistock Investments.
“This is the biggest financial crisis of our lifetime, because it affects the average person,” Raven said. The problem could be felt more broadly around the world, Raven said even though Tavistock is focused on the U.K. A financial shock bigger than in 2008 could soon be triggered as the bond markets are in a state “never seen before”, he argued.
Bonds are perceived to be a safe haven in times of economic stress and have seen three decades of price gains. They are pieces of paper that companies, governments and banks sell to raise money. In times of rising inflation, they also traditionally perform poorly. In an effort to boost the global economy and increase lending, central banks have been busy buying up bonds in the last 10 years. Many economists now believe the market has become distorted as that move has further accentuated the move higher for bond prices.
“The more conservative central banks that have been skeptical of quantitative easing have long warned that long periods of low interest rates can sow the seeds of the next crisis.”-Jan Randolph, Director of sovereign risk at IHS Markit
There are concerns that bonds could lose value quickly in a market that is not very liquid with inflation recently seeing a pickup and with central banks preparing to put an end to ultra-loose monetary stimulus. Concerns that bondholders aren’t fully aware of the risks are also being expressed.
“The more conservative central banks ( e.g. Bundesbank ) that have been skeptical of quantitative easing have long warned that long periods of low interest rates can sow the seeds of the next crisis by smothering relative prices in the financial markets — but it is difficult to tell where ahead of time because of the ‘fog’ created,” Jan Randolph, director of sovereign risk at IHS Markit, said.
“There is a risk of a sharp rebound in prices as monetary policies tighten and liquidity problems if investors stampede out these more risky markets when risks start to crystallize,” he added.
The assumption that they’ll definitely see significant losses as central banks reduce their bond-buying programs is not agreed to by everyone even though there’s been many gloomy forecasts for the bond market. The recent economic recovery should be enough to offset the impacts of lower bond prices, believes Mike Bell, a global market strategist at JPMorgan Asset Management, but said that this monetary tightening creates a risk.
“Eventually tighter monetary policy could tip the U.S. economy into recession, but we believe that the economy and equity markets can withstand at least the next year’s worth of monetary policy tightening,” he said.
“We certainly don’t expect the next bear (negative) market to be as bad as the financial crisis in 2008 as banks are much better capitalized than they were in 2008. We therefore expect the next bear market to be a more classic recession rather than a full-blown financial crisis,” he added.
(Adapted from CNBC)