Policy Makers Are Comfortable With Asset Prices But Bankers Are Cautious

The guardians of the world economy brushed aside soaring stock and asset prices as a threat to economic and financial stability even as some bankers warned that investors risk repeating their pre-crisis complacency.

The rare turnabout in which central bankers and finance ministers expressed comfort with the level of markets — even as private-sector executives urged caution — took place in and around a generally upbeat annual meeting of the International Monetary Fund in Washington.

“I don’t see risks mounting in the financial markets in the U.S., Europe and Japan,” Bank of Japan Governor Haruhiko Kuroda said. European Central Bank President Mario Draghi said he saw little sign “stocks and bonds are having valuations that are stretched when compared with historical averages.”

Crisis Eve

By contrast, Jes Staley, chief executive officer at Barclays Plc, said the market “feels as benign in 2017 as it felt in 2006,” referencing the eve of the financial crisis that plunged markets into turmoil and the world into recession. Martin Gilbert of Standard Life Aberdeen Plc said “asset prices generally are far too high.”

The MSCI World Index of stocks this week hit a record high, extending its gains of 2017 to 16 percent, while the Chicago Board Options Exchange’s volatility index fell to its lowest ever this month.

To some, such performances are justified by a mix of strengthening economic expansion and weak inflation, underscored by the IMF’s move this week to raise its forecasts for global growth this year and next. Others fret markets have become overly frothy after a decade of easy monetary policy that central banks may soon reverse.

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“There is clearly an optimistic wind in terms of global growth,” said French Finance Minister Bruno Le Maire. “People are watching carefully on asset prices and debt levels.”

Tax-Cut Hopes

U.S. Treasury Secretary Steven Mnuchin echoed his boss, President Donald Trump, in taking credit for the rise in stocks, arguing it reflected “an anticipation of us getting tax reform done.”

One of his predecessors was less upbeat.

“There’s an element of complacency, via self-denying prophecy,” said Lawrence Summers, now a Harvard University professor. “Or to paraphrase FDR, an important thing we have to fear is the lack of fear itself.”

Summers, who was secretary under Bill Clinton and chief economic adviser to President Barack Obama, noted that a decade of ultra-low interest rates and bond buying had deprived central banks of the firepower they would need to combat another slump. “How are we going to respond to that is going to be a real concern,” he said.

Larry Fink, who runs BlackRock Inc., the world’s largest asset manager, said any normalization of volatility could cause “a pretty large setback” for investors.

Not every policy maker is sanguine nor every banker worried. Federal Reserve officials, for example, have suggested they will be more inclined to raise interest rates to deter excessive risk taking in markets.

Boston Fed President Eric Rosengren told Bloomberg Television on Friday in Boston that he frets low rates spur a reach for yield, leaving investors more exposed to a shock.

Fed Governor Jerome Powell — a candidate to succeed Janet Yellen as chair — used a speech on Thursday to highlight “significant” risks emanating from corporate debt loads in emerging market economies.

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But Daniel Pinto, JPMorgan Chase & Co.’s investment bank chief, said on Saturday that the global expansion “may last a while” given leverage in markets remains conservative and inflation low. Douglas Peterson, CEO of S&P Global, said credit conditions are “pretty stable.”

The IMF walked the line between both schools of thought.

“There are countries where the monetary policy needs to continue being accommodative while being attentive to the risks developing on the financial markets,” said Christine Lagarde, the IMF’s managing director. “It’s a subtle trade-off that they need to apply in order to continue to support the recovery.”

— With assistance by Stephen Morris, Enda Curran, Rich Miller, and Yoshiaki Nohara

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