While just about every other central bank on the planet is giving everyone two thumbs up on the economy, the deputy chair of the Monetary Authority of Singapore (Lim Hng Kiang) said last night at a dinner that “an uneasy calm seems to have settled in markets” and that “we remain in uncharted waters.”
It was pretty amazing, really, to see such pointed language from a central banking official.
Mr. Lim jabbed at the “obvious” risks and said there would be “bumps on the road” ahead. That’s putting it mildly.
Warren Buffet once said that ‘only when the tide goes out do you discover who’s been swimming naked.’ (In my mind he says it like ‘nekked’ but I seriously doubt he pronounces it that way…)
That’s exactly what happens in severe financial crises. You find out which banks have been playing it safe… and which have so mind-numbingly stupid it’s a miracle they’re still around.
Banks bleed cash. And if they don’t have enough of it on hand, the bleeding turns into a sucking chest wound.
It’s at this point that they’ve been caught red handed swimming naked, and they need to go raise cash from somewhere, anywhere else.
So they start selling assets– loans, securities, and even shares of the bank itself.
But banks with razor thin capital ratios (i.e. a bank’s net equity as a percentage of total assets) will fold. Or go to the taxpayer with their hats in their hand claiming to be too big to fail.
This is precisely what happened to the US financial system back in 2009. Lehman Brothers. Wachovia. Washington Mutual. Etc. They were all swimming naked, with very little liquidity and miniscule capital levels.
Singapore’s monetary authority is obviously concerned about financial markets. They understand that you can’t expect to conjure trillions of dollars out of thin air without creating epic bubbles and even more epic consequences.
Sure, you can shuffle those consequences out a few months… even a few years. But at some point those bubbles must be reckoned with.
Perhaps the greatest concern is how few people seem to care.
Central banks and institutional investors turn a deaf ear to obvious risks and fundamentals that are screaming out in desperation hoping some conservative steward will notice that we are tap dancing on a knife’s edge, where nearly every single financial market is simultaneous at/near an all-time high, and central bankers keep pumping money into economies that they claim to be ‘recovered’.
This is the ‘uneasy calm’ that Mr. Lim discussed– a prevailing attitude that there’s nothing to see here; keep calm and buy the all-time high.
And he’s telling banks to get ready for something to happen.
If a senior official presiding over one of the world’s safer banking jurisdictions wants his banks to become even safer, a rational person would certainly wonder– “What do these guys know about the financial system that I don’t?”
They must be expecting the mother of all busts.
Full article: Singapore official discusses ‘uneasy calm’, tells banks to prepare for financial collapase (Sovereign Man)