RBA warns of 'violent' disruptions

SpacePete · Oct 14, 2014

From today's news in the AFR (if anyone has a link to the full online version, please post).

What would be the immediate impact on PM prices?

RBA warns of 'violent' disruptions
Bond, stock and currency investors are severely underestimating a growing list of threats that would unleash a dramatic market shakeout they're not ready for, RBA assistant governor Guy Debelle said.

In one of the bluntest warnings issued since the GFC, Dr Debelle said there was a "dangerous" complacency in financial markets and a route on bond markets could be "relatively violent".

SpacePete · Oct 15, 2014

We're being told by someone from the RBA not to put too much faith in what the central banks say:

Sell-off will be violent, RBA tells investors

INVESTORS should brace for a "violent" sell-off in financial markets as their naive beliefs about risk, liquidity, and interest rates are inevitably mugged by reality, a senior Reserve Bank official has warned, while reiterating the RBA's desire for an even weaker Australian dollar.

In unusually frank remarks, the RBA's head of financial markets, Guy Debelle, said recent spikes in volatility in currency and equity markets from historically low levels were modest and a small taste of things to come, slamming investors' complacency and somewhat curiously their misguided faith in central banks' projections.

"I find it somewhat surprising that the market in aggregate is willing to accept the central banks at their word and not think so much for themselves," he said, -arguing there was at least as much uncertainty about the future path of interest rates as in earlier -periods.

"While there is more forward guidance from central banks than in the past, investors don't have to believe it," he said.

Dr Debelle, speaking at a Citi investment conference in Sydney, was puzzled that rising geopolitical tensions in the Middle East and Ukraine had not fuelled more volatility but was certain the recent eerie calm would end.

More: http://www.theaustralian.com.au/new...-tells-investors/story-e6frg6n6-1227090609277
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Ouch · Oct 15, 2014

SilverPete said:

We're being told by someone from the RBA not to put too much faith in what the central banks say:
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Is this another variant of the Liar's Paradox?

hawkeye · Oct 15, 2014

Reading between the lines

Debelle says
"We are actually pretty useless as an institution and cannot fulfil the claims we make." See RBA mandate.

If he was being honest

Debelle says
"Our own market manipulations along with government policy have caused a massive overflow of credit which is threatening to unwind violently".

hawkeye · Oct 15, 2014

Guy Debelle, said recent spikes in volatility in currency and equity markets from historically low levels were modest and a small taste of things to come, slamming investors' complacency
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I can see what's coming next. It's all the fault of the free market (investors). Luckily we will have the central bank to save the day when the investors (free market) screw up again.

and somewhat curiously their misguided faith in central banks' projections.
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Hilarious. Kind of like him saying "why are you listening to us, you idiots?".

SpacePete · Oct 15, 2014

Everyone will basically ignore this warning, and when the market takes a giant steaming dump on them we will hear excuses like "no one could've seen it" and talks of bailouts funded by taxpayers.

SpacePete · Oct 15, 2014

Straight from the RBA website. How much clearer can they get?

"So in conclusion, there are a number of anomalies present in financial markets in terms of pricing and volatility. There are also some misplaced perceptions amongst market participants about the degree of liquidity present in some market segments. That strikes me as a dangerous combination and unlikely to be resolved smoothly."

[h]Volatility and Market Pricing[/h]

Guy Debelle, Assistant Governor (Financial Markets)

Financial markets have been quiet, maybe too quiet, for much of this year. Of course, in saying this it increases the likelihood of it ending sooner rather than later!

...

First, there are a number of investors buying assets on the presumption of a level of liquidity which is not there. As I said earlier, this is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions.

But there are probably a sizeable number of investors who are presuming they can exit their positions ahead of any sell-off. History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly.

...So there is a fair chance that volatility will feed on itself. One should always be careful of looking for too much rationality in trying to understand market dynamics. Given the lack of rational arguments for the current state of affairs, trying to rationally explain how it will unwind is also going to be difficult.

Another reason to suspect that the sell-off might be violent is the starting point, namely zero nominal interest rates. That is a point we haven't started from before (with the possible exception of Japan). There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer zero, those positions will blow up. Where are they? How large are they? I don't really have a good answer to those questions. It appears more likely that they are held by real money investors than directly on the balance sheets of the core banking system, which is probably a good thing. But then if we think back to 2007, structured investment vehicles weren't directly on the balance sheet of the core banking system either.

...In thinking about the magnitude and nature of any sell off, an important question to think about is who will take the other side of the trade? How far do prices need to go before someone is willing to take the position? Those questions are always relevant but the answers may be different this time around.

...

More generally, we are in an unusual environment where monetary policy settings in the four major economic regions the US, China, Europe and Japan are moving in divergent directions. It is an extreme environment that both markets and policymakers are operating in, where the balance sheets of major central banks are at an unprecedented size. It is challenging for foreign exchange markets and it creates a complicated environment for setting monetary policy in other parts of the world, including here in Australia.

...

So in conclusion, there are a number of anomalies present in financial markets in terms of pricing and volatility. There are also some misplaced perceptions amongst market participants about the degree of liquidity present in some market segments. That strikes me as a dangerous combination and unlikely to be resolved smoothly.

http://www.rba.gov.au/speeches/2014/sp-ag-141014.html
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The full entry on the RBA website has allot more detail.

betterinvestmentthanshare · Oct 15, 2014

SilverPete said:

Everyone will basically ignore this warning, and when the market takes a giant steaming dump on them we will hear excuses like "no one could've seen it" and talks of bailouts funded by taxpayers.
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You have to ask yourself why?

hawkeye · Oct 15, 2014

SilverPete said:

Everyone will basically ignore this warning, and when the market takes a giant steaming dump on them we will hear excuses like "no one could've seen it" and talks of bailouts funded by taxpayers.
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But it's kind of like cutting the brake lines on a car, rewiring the electronics so it gives a positive signal rather than says something is wrong, telling people it's OK to get in and drive it and then once they are driving it, then you give the warning that it might crash for some heretofore unspecified reason but implying that it's probably because the people driving are bad and/or reckless drivers and they shouldn't have listened to you when you said it was OK to drive.

Eruaran · Oct 15, 2014

Meanwhile in silverland...

mrearthman · Oct 15, 2014

At the moment it's going down in an orderly fashion will be interesting to see if there is a major flash crash type correction sooner or later.

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