"Complacent investors are missing the warning signs of what could be the next global financial crisis according to former federal Liberal leader John Hewson. He says there is a real risk of a global trade war akin to what happened at the height of the great depression and its incumbent upon politicians and regulators to fess up and talk straight about the risks."
There is a risks of another major trade war similar to what happened at the height of the Great Depression and that it is encumbent on politicians and regulators to "fess up" and talk straight about these risks to the Australian electorate.
"You can see the build up in factors that will lead to a crisis, but the timing is very difficult to predict. But if ypou look around the world, you really have significant bubbles in stock markets, property markets and in bond markets and serious currency misalignments."
Risk of a major crash are greater than 50%.
How does Australian compare to overseas. You are talking about our huge debt level. Most of that is mortgage debt. Is that the biggest issue for you? Hewson "Well, it is a very big issue because over time house prices have run to the point where the median house prices are beyond the reach of many younger Australians - and the debt that is behind that, a lot of people have over-borrowed, a lot of people have got interest-only loans that are now going to have to be renegotiated. Very large multiple of household debt to peoples income as we have seen in recent data. These are all elements of a difficult situation. The RBA is powerless to respond." And now the RBA wants to raise interest rates but household debt constrains the RBA significantly. "So yes, we are in a very difficult position. .... Governments have to be open and honest about this."
Having studied, analysed, and worked in financial markets since the late 1960s, I have drawn two clear conclusions – basically, financial markets, including key regulatory authorities, do not understand “risk”, and they certainly do not “price” it correctly. (BB comment: John Hewson is saying the market is "inefficient" in the sense of the Efficient Market Hypothesis. https://en.wikipedia.org/wiki/Efficient-market_hypothesis)
Against this background I was particularly struck by, and disturbed by, our Reserve Bank’s comment on the global situation in this week’s announcement on the cash rate. “Financial markets have been affected by political developments in the eurozone, particularly in Italy," it said. "There are also concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies.” These “weasel words” have become so typical of Reserve Bank/ Treasury ease. While making absolutely no attempt to spell out the risks and potential consequences for Australia, indeed to actually take account of them formally in their forecasting and advice to government, they nevertheless feel self-assured that if ever questioned in the context of a crisis, before a Senate Committee, or even in public, they can say, “Yes, we took account of those risks. We ticked that box - we did mention that in our press release, or in some budget paper.”
I'm busy working on my blog posts. Watch this space!