Why Governor Rajan maybe right on predicting an impending market crash?

Business

oi-Sunil

By Sunil Fernandes

Published: Thursday, August 7, 2014, 13:37 [IST]

It's been a few years since central banks across the globe, including those in Japan, US and Europe adopted a loose monetary policy. Low interest rates and cheap abundant liquidity always poses that extra threat of of a "bubble busting" somewhere down the line. If you can borrow virtually free, and do not pay much for capital, you can borrow endlessly and chase risky assets from real estate, equities and even paintings.

Reserve Bank of India (RBI) Governor Raghuram Rajan has warned of a possible crash in global markets in an interview published with the Central Banking Journal. Rajan predicted it rightly in 2008 and is probably hinting at one more crash.

"Unfortunately, a number of macroeconomists have not fully learned the lessons of the great financial crisis. They still do not pay enough attention - en passant - to the financial sector. Financial sector crises are not as predictable. The risks build up until, wham, it hits you," Rajan has said in the interview.

Nobody is a pundit and we are not sure if there would eventually be one. But, tell-tale signs are in there. Worries over China have re-merged. One report recently said that Chinese capital is creating real estate bubbles all over the place. Two richest men in London are Chinese Property investors. In fact, if the reports are to be believed as much as $6 billion flowed into the Australian real estate markets this year from China.

Too much liquidity has already pushed the US Dow Jones to a record in excess of 17,000 points, having hit multiple highs several times this year. Cheap money has pushed the German DAX also to a record high and easy liquidity around the globe keeps chasing Indian stocks. In fact, India has received $24 billion into its capital markets this year as there is abundance of liquidity around the globe, as Japan, US and Europe keep printing more money. Indian stocks keep hitting highs every alternate week and have now become horribly expensive. thanks to easy money from foreign funds.

Governor Rajan had warned of a callous attitude from investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices.

"They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time - there will be major market volatility," says Rajan. "True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and prayer."

It's taken a good 5-6 years for the world to recover post the Lehman Brothers crisis, the hope is that we understand and stop chasing risky assets at any and every price.It's time central banks unwind their loose monetary policy.

GoodReturns.in