PARIS – Cash is so cheap these days that investors have been borrowing and plowing them in assets from artwork to wine to bitcoins, betting that prices would rise. And rise they did, some even setting records, but market watchers are now warning that asset bubbles may be forming and could well burst in 2014.
Central banks have been flooding the market with money at record low rates, deploying liquidity to fight crisis after crisis since 2008. “We survived a major fire” that was put out “with a lot of liquidity,” said Bertrand Badre, financial director of the World Bank, during a roundtable at the French market regulator AMF.
“The Federal Reserve and others are continuing to water the market, but I think that at some point, we have to take stock of the situation,” he said.
AMF Chairman Gerard Rameix said that “a risk that everyone agrees is a major one: is the abundance of liquidity,” pointing out that one of the factors that sparked the U.S. subprime crisis — the trigger of the 2008 global economic crisis — was excess liquidity.
In the heady days of early 2000, low interest rates fueled lending. Even those with poor credit records were allowed to take out home loans, which those in the industry called subprime loans.
When property prices began to fall and interest rates rose, a large chunk of the population were caught in a double-squeeze, and many were forced to default on their debt, sparking the subprime mortgage crisis.
With billions of bad debts on their books, banks cut off lending, choking off the lifeline to companies that required financing to function. To prevent a total meltdown of the global economy, central banks stepped in and released billions in liquidity. But what began as stop gap action later became a move to prop up the world economy, which was sliding into recession.
Interest rates have plummeted to record lows. The European Central Bank in November slashed its key rate to an all-time low of 0.25 percent, matching the rate the U.S. Federal Reserve has had in place since the end of 2008.
It is now so cheap to borrow that investors are leveraging on loans and reinvesting them in assets in the hopes that prices rise.
It’s not surprising then that artwork and wine both fetched record prices at auctions while bitcoins broke through $1,000 per unit at the end of November.
“In a low-rate environment, investors are looking anywhere for some sense of yield. So, you’ve started to see bubbles develop in different niche sectors like art, wine, farmland or low-rated corporate debt,” said Tim Adams, director of the Institute of International Finance. But the White House nominee to succeed Federal Reserve Chairman Ben Bernanke, Janet Yellen, denied during a Congress hearing that the U.S. easy-money policy, including near-zero interest rates and $85 billion a month in bond-buying stimulus, had generated fresh bubbles in property or stock markets. Some analysts also slapped down fears that assets were overvalued.
Eric Turjeman from Amundo said, “If the market doubles while profits are not doing likewise, I would say that there is a bubble … but today, that is not the case.”
But fund management giant Pimco warned in a tweet: “Be careful, though, of red numbers in 2014. All markets are bubbly.”
Markets have been transfixed for months by the prospect the Fed will begin to reduce the amount of stimulus it injects into the economy.
A perverse logic has gripped markets, with indications of a strong recovery in the U.S. economy sending stocks down as traders bet on an early Fed tapering of stimulus, while poor data and the prospect of more easy money has sent Wall Street to record highs.
News last week the U.S. economy grew at a 3.6 percent pace in the third quarter, much better than earlier estimates and the strongest rate in almost two years, stoked speculation the Fed could announce a first reduction in its monthly bond-buying after its Dec. 17 to 18 policy meeting.