While CEOs trot out the usual ‘buy stocks coz things are gonna be awesome’ narrative during their on-camera blurbs at Davos, behind the scenes, the sentiment is considerably worse…
Bloomberg reports that global finance executives warned of parallels between today’s soaring stock markets and the froth of the pre-crisis years as they said investors could be wrong-footed by central banks raising interest rates.
The leaders of Barclays, Citigroup, and the Carlyle Group all fretted that the strongest global economy since 2011 was leaving financial markets complacent…
Citigroup Chief Executive Officer Michael Corbat fears the violence of the next inevitable downturn… and worries about the ignorance of surging debt costs…
“There is a numbness out there, there is an ambivalence out there that’s concerning,”
“When the next turn comes — and it will come — it’s likely to be more violent than it would otherwise be if we let some pressure off along the way.”
Jes Staley, the CEO of Barclays, said the upbeat environment reminded him of the eve of the last crisis a decade ago and that the combination of stocks at record highs and volatility near all-time lows wasn’t “sustainable” in the long term. He too said trouble could occur if central banks such as the U.S. Federal Reserve push up borrowing costs faster than investors anticipate.
“I do feel it’s a little bit like 2006, when we were all talking whether we’ve solved the riddle of economic crises,” said Staley.
“We’ve got a monetary policy that’s still in the remnants of the depression era. We’ve got very little capacity in the capital markets to deal with a real move in interest rates.”
And Carlyle’s David Rubenstein, who co-founded the private-equity firm more than 30 years ago, warned…
“The biggest concern I have is that most people think there’s no problem of a likely recession this year or early next year,”
“Generally, when people are happy and confident, something wrong happens.’’
And the common-denominator in many of these CEOs fears was a rising-rate environment, in which Harvard University professor Kenneth Rogoff, who co-wrote the definitive history of the financial crisis, expressed the most concern:
“If interest rates go up even modestly, halfway to their normal level, you will see a collapse in the stock market,”
“I don’t know how everything from art and bitcoin to stock prices will react as interest rates go up.”
Standard & Poor’s sums it up well, noting that, with interest rates around the globe close to record lows, companies have binged on cheap borrowing. U.S. corporations have a record amount of debt and leverage, with many as vulnerable to default as before the crisis.. and yet credit spreads are at record lows…
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