'Worrying signs' of bubble in real estate, credit boom

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Asset inflation is the main demon as oppose to the traditional measure of inflation...

'Worrying signs' of bubble in real estate, credit boom

BIS report signals growing risks in many countries
Published on Jun 30, 2014 1:25 AM


ZURICH - Regulators should not dismiss "worrying" early signs of unsustainable property price and credit growth, which could leave borrowers vulnerable to interest rate rises or sharp downturns, the body bringing together the world's central banks has warned.

The Bank for International Settlements (BIS) said rock-bottom official interest rates, slashed to revive sluggish economies, have led to a surge in lending and real estate prices in some countries.

As memories of the financial crisis fade and market confidence soars, investors desperate for any return on ultra-cheap money could be creating yet another bubble. Central banks in the euro zone, Japan, Britain and the United States also risk keeping the taps of cheap money open for too long.

"Several early warning indicators signal that vulnerabilities have been building up in the financial systems of several countries," the BIS said in its annual report released yesterday.

While no early warning indicator is completely reliable, dismissing such readings as inappropriate would be too easy, it said.

The warning comes after Bank of England governor Mark Carney rowed back from earlier indications that he would raise interest rates next year.

US Federal Reserve chair Janet Yellen said this month the Fed doesn't intend "to signal any imminent change" in policy and that the balance sheet will remain large "for some time".

The BIS said that in many emerging market economies and Switzerland, the credit-to-gross domestic product (GDP) gap, measuring the current ratio against its long-term trend, is "well above the threshold that indicates trouble".

The gap between real residential property prices and their long-term trend also suggests risks are accumulating in the housing sector, it added.

Rising rates would push the debt service ratios - the share of income used to service debt - of several countries into critical territory, the BIS said, adding that borrowers in China are now seen as the most vulnerable.

BIS chief economist Shin Hyun Song told Reuters that pension funds and other long-term investors are also taking ever bigger risks and could be laying the ground for turmoil when money gets more expensive.

Companies are turning increasingly to financial markets for funding, with gross issuance in the high-yield bond market alone soaring to US$90 billion (S$112.5 billion) per quarter last year, from a pre-crisis quarterly average of US$30 billion, the BIS annual report said.

Such offers found eager investors, including asset managers and pension funds, who were willing to take greater risks to meet return targets or pension obligations when interest rates, volatility and funding costs are all unusually low.

"Things look and feel great but we are storing up a possibly more painful and more destructive reversal," Mr Shin said.

"The one thing that is different between now and 2006/2007 is that the protagonists... are no longer... the banks. This risk-taking is happening through other market players. Long-term investors are also joining in."

Mr Shin called on regulators to be alert to the new risks. "As we have strengthened the regulation on banks, the risks have also changed," he said. "We should not be blind to the fact that we have to address these new risks as they arise."

Property markets are also heating up and the Bank of England sought to put the brakes on Britain's surging housing market on Thursday by announcing a cap on home loans and tougher checks on whether borrowers can repay their mortgages.

Swiss banks will also tighten requirements for mortgage loans after repeated warnings from its central bank and the International Monetary Fund that ultra-low interest rates, immigration and the country's safe-haven appeal for financial investors is feeding a property bubble.

Mr Shin, who helped formulate South Korea's financial stability policy in 2010, cited places like South Korea, Hong Kong and Singapore for successfully using tools, such as limits on loan-to-value or debt-service-to-income ratios, to temper inflated asset prices.

"There is some reluctance in advanced economies to use these macro-prudential tools and that's because these tools are relatively untested in many cases there. There is some catching up to do, in terms of the familiarity," he said.

Interest rates alone could be a very blunt tool to deal with soaring property prices, because they affect the economy as a whole, and combining rate policy with macro-prudential tools would make both more effective, he said.

REUTERS, BLOOMBERG

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When you can't beat the bubble, you will take insurance against it by investing in it "forever"

Norway oil fund to enter Asian real estate market
And it says it's targeting an investment horizon of 'forever'


15 Nov5:50 AM
Oslo

TARGETING an investment horizon of "forever", Norway's US$860 billion oil fund plans to enter the Asian real estate market next year and aims to broaden its asset range to include anything from new developments to refurbishments, it says.

Stepping up its activity after a gradual start and aiming to invest around US$8-10 billion a year, the fund will also do more property deals on its own as it struggles to find partners with deep enough pockets, Karsten Kallevig, its real estate chief, told Reuters on Friday.

Norway's sovereign fund, the world's largest, has featured in a number of large real estate deals this year, buying Boston's One Beacon Street tower with Metlife, Paris's La Madeleine building, and the Pollen Estate in London's West End.

The fund currently has around 1.3 per cent of its assets in real estate but has a mandate to take the allocation up to 5 per cent.

It will stick to buying property in a limited number of big cities, including two it has yet to pick in Asia. Its real estate strategy has already yielded unexpectedly high returns, Mr Kallevig said, although he did not believe returns would stay quite as high.

"We have done very well and probably so well that it's not really sustainable," he said. "There is no reason we should have this high a return on a portfolio of this type. If you do the math on an IRR (internal rate of return) basis, our return is approaching double digits."

In crowns, the real estate portfolio returned 8.95 per cent in the first nine months of this year, beating the fund's overall 7.35 per cent return and the government's 4 per cent real return target.

With interest rates holding near record lows and stocks reaching full valuation, the real estate market has boomed this year, with analysts predicting that the US and German market recoveries still have some way to run while Britain's is already closer to its top.

The fund does not aim to beat market cycles but seeks long- term growth. "Real estate has always been cyclical. So at some point there will be a downturn, unless x hundred years of history suddenly stops right now," Mr Kallevig said.

Norway's fund has bought just over US$10 billion in properties in a handful of European and US cities since 2010 but has been buying rapidly this year and aims to invest about one per cent of its assets in property each year for the next several years.

A developed country with just 5 million people that produces around 1.5 million barrels of oil a day, Norway already has around one per cent of global shares stashed in a sovereign wealth fund which the government expects to grow to US$1.1 trillion this decade.

Inflows will end once oil runs out but that is still decades away, and even then the fund will continue to operate like an endowment, with only the returns used by the budget and the rest reinvested.

The fund has invested jointly with a wide range of investors like Prologis, financial firm TIAA-CREF and MetLife. Its focus cities for real estate have included Boston, New York, Washington, San Francisco, London, Paris, Munich and Berlin, with Asia being the next step in its expansion.

"In Asia, we have done a lot of work and we'll probably pick two cities to start with, hopefully in 2015," Mr Kallevig said. "There are more than two cities of interest in Asia but to do your job properly, you can't start with more than two."

The fund will also broaden its portfolio after primarily buying high-end office space in key cities, though residential property is not high on its priority list.

"If we really understand these markets, then we should be able to understand the risk associated with taking on a vacant building, taking on a repositioning, a redevelopment, even a full ground- up development," Mr Kallevig said.

The real estate unit, which makes its commercial decisions from its New York and London offices, has grown to 60 people since its start in 2010 and could grow as big as 200-strong over time, he said. Reuters

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Jun 24 2015 at 9:00 PM Updated Jun 24 2015 at 9:00 PM

OECD fears alternative assets 'bubble' as investors chase yield

The OECD fears "a big bubble in private equity, absolute return funds, synthetic exchange traded funds and hedge funds". Nick Moir


by Jacob Greber
Savers and self-managed super funds are becoming so desperate for yield they are helping generate a major "bubble" in alternative assets such as hedge and exchange traded funds, with many increasingly buying riskier bonds with fewer legal protections, according to one of the OECD's top officials.

In what is effectively the first global investor's handbook ever produced by the Paris-based organisation, the fund suggests equities still are likely to be a better long-term bet.

"I'd still rather have a good equity than a high-yield bond," Adrian Blundell-Wignall, a special adviser to the secretary-general of the OECD and a former Reserve Bank of Australia official and BT investor, told The Australian Financial Review.

Research published by the OECD on Wednesday shows that the world's top 10,000 companies are still reasonably close to their average valuations of the past decade or so.


In a groundbreaking piece of research, Dr Blundell-Wignall and his team compared the market capitalisation of the world's biggest stocks to global gross domestic product – essentially replicating at a worldwide scale a measure of value made famous by billionaire US investor Warren Buffett.

On that measure, the OECD's research shows that compared to high-yielding bonds, equities are roughly on par with where they stood prior to the 2008 global financial crisis, at just below 80 per cent of global GDP.

"Yes it's true, [valuations] have got to a level where there's been a stalling-out or correction in the past but it's not in the extremes," he said.

"You can surely find some good companies that can generate cash and aren't in a bubble."

DANGEROUS SURGE IN MONEY

By contrast, the ballooning global market for high-yield bonds has produced a dangerous surge in money flowing into riskier alternative investments that could leave many investors wrong-footed once ultra-low global interest rates normalise.

"There's a big bubble in private equity, absolute return funds, synthetic exchange traded funds and hedge funds," he told the Financial Review.

With fewer options available for returns on equity and government bond markets, investors have increasingly been willing to accept bond products with fewer legal protections if they go bad.

Research by the fund shows the quality of so-called covenants – or protections – on high-yield bonds has fallen in recent years

"The protections you get when you buy a bond are deteriorating on average," he said.

"People are saying we need high yield, so they're putting money into corporate bonds, so a lot of hedge funds, EFTs are referencing these things.

"People are so desperate for yield given the alternative is zero return, the issuer says 'we'll give you yield but you don't get protections'.

"Which means these bonds are illiquid but people are still snapping them up," he said.

The warning comes as the global savings pool for baby boomers and subsequent generations is expected to surge.

FUNDS TO RISE BY THIRD

According to the OECD, the value of pension funds, insurance company holdings and mutual funds will rise by a third over the next five years to US$119.6 trillion ($154.8 trillion).

An increasing amount of that money is flowing to what Dr Blundell-Wignall described as the "shadow world" of the financial system.

"If you're a cash fund, you need to borrow securities from pension funds and securities, so you get broker dealers intermediating", outside of more transparent trading platforms.

The risk for investors will become apparent in the next crisis or even as global interest rates begin to rise, he suggests, when the lack of liquidity in many of these investments will become apparent.

The OECD report lists a series of potential triggers for the next liquidity crisis, including monetary policy normalisation, an "overshoot" in the US dollar's appreciation; an emerging market crisis; a failure of Europe's quantitative easing to restore growth and the region's deflation and banking problems leading to a Greek exit; as well as a sudden plunge in oil prices.

"Any of these events would likely trigger asset price volatility, margin and collateral calls within the shadow banking system," the OECD said in the report.

Dr Blundell-Wignall said another danger is that many long-term pension funds, a large number of which have defined benefit schemes, particularly in European countries, are rapidly approaching an "insolvency crisis" where they will no longer be able to deliver on promises made to retirees about future income.

He said many such funds are increasingly forced to replace their current holdings of 20-, 30- and 40-year bonds at a time when interest rates are near zero.

"The returns from the assets that the pension funds are retiring is really dropping all the time.

"Pension funds are coming up to an insolvency crisis of some form," he said.

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Advanced economies leaning too much on monetary easing, says BIS
Date
June 28, 2015 - 11:48PM

Mark Mulligan
Markets and economy reporter


Demonstrators in Lisbon, Portugal, march in favour of the Greek government.

Easy money from central banks is continuing to inflate financial assets and property prices, pushing up risk in some markets and economies and creating a mismatch between liabilities and assets for institutional investors such as pensions funds and insurers, according to the Bank for International Settlements

The BIS, in its annual report, warns that countries are leaning too much on their central banks to stimulate growth and cautions that extreme monetary easing is no substitute for fiscal and structural reform.

Its comments come as global markets brace for a week of upheaval after Greece failed to agree a bailout package with its creditors, raising the spectre of a default on €1.5 billion in payments due to the International Monetary Fund on June 30.

Countries are leaning too much on their central banks to stimulate growth.
Countries are leaning too much on their central banks to stimulate growth. Photo: Chris Pearce
The BIS says Greece's woes are part of a broader trend by which governments are shirking their responsibilities on structural and fiscal inefficiencies while central banks print money or hold interest rates at historical lows.

Although the BIS uses Greece as example, Reserve Bank of Australia governor Glenn Stevens has referred to the same tendencies in his commentary on the Australian economy.

"In some respects, developments in Greece, and in the euro area more generally, are akin to the broader global challenges but amplified by institutional specificities – a toxic mix of private and public debt and too little commitment to badly needed structural adjustments," the BIS says in its annual report.

"As a result, monetary policy, seen as a quick fix to buy time, has borne the brunt of the burden.

"On strictly economic grounds, the euro area seems better placed to cope with contagion than when the [global financial crisis] crisis first broke out.

"Yet uncertainty lingers, and the potential for political contagion is even harder to assess."

Although the European Central Bank has set up fire-breaks to stop Greece directly contaminating other eurozone economies, analysts have identified a number of contagion risks. One is that other member countries struggling with slow growth, heavy debt burdens and high unemployment might see exit from the eurozone as a viable alternative if Greece drops out.

Another is that the current run on deposits from Greek banks might undermine the integrity of the euro, encouraging savers in other troubled economies such as Spain and Portugal to follow suit.

The BIS also identifies the build-up of government debt in advanced economies as a "drag on long-term growth".

"Already generally high pre-crisis, this has ballooned since 2007," the bank says in its annual report.

"The average ratio of gross public debt to gross domestic product is expected to reach 120 per cent in the advanced economies at the end of 2015, well above the pre-crisis average of 75 per cent," it said.

"Some countries have much higher debt ratios: for instance Japan (234 per cent), Greece (180 per cent) and Italy (149 per cent).

"While most countries have taken steps to strengthen fiscal positions, with fiscal balances forecast to improve by around 1.6 per cent of GDP in 2015 compared with 2012–14, this has not yet set them on a sustainable long-term path," it cautions.

The BIS sees growing risks in persistently low interest rates, with real rates - after inflation - below zero in some countries. Aside from hurting banks' balance sheets by squeezing margins, ultra-low reference rates also undermine the profitability of insurance companies and pension funds and create mispricing of a range of assets as professional investors scour higher-risk markets for elusive yield.

"Equity and some corporate debt markets, for instance seem to be quite stretched," the BIS says.

It says such low rates also affect retirees' savings and incomes and can crimp demand, which in turn discourages business investment.

"In the shorter term, the plight of pension funds is just the most visible reminder of the need to save more for retirement, which can weaken aggregate demand," the BIS says.

"Over a longer horizon, negative rates, whether in inflation-adjusted or in nominal terms, are hardly conducive to rational investment decisions and hence sustained growth.

"If the unprecedented journey towards lower negative nominal interest rates continues, technical, economic, legal and even political boundaries may well be tested," the BIS says.

Despite its warnings, the BIS is mildly upbeat on recovery and growth prospects for companies and countries, pointing out that "balance sheets are being repaired and some deleveraging has taken place".

Lower energy prices had also helped, it said.

However, it says the costs remain high if economies fail to wean themselves off cheap money.

"The policy mix has relied too much on measures that, directly or indirectly, have entrenched dependence on the very debt-fuelled growth model that lay at the root of the crisis," the BIS says.

"These tensions manifest themselves most visibly in the failure of global debt burdens to adjust, the continued decline in productivity growth and, above all, the progressive loss of policy room for manoeuvre, both fiscal and monetary."

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Jun 30 2015 at 6:40 PM Updated Jun 30 2015 at 7:28 PM

RBA's Glenn Stevens says normal monetary policy is still far away

Glenn Stevens warned that the eventual return to more normal monetary policy settings was likely to be painful for many investors. Glenn Hunt


by Jacob Greber
Reserve Bank of Australia governor Glenn Stevens has warned it may be many years before global monetary policy returns to normal, with central banks increasingly resorting to untested regulatory tools to prevent asset price bubbles.

While defending the decisions of central banks around the world to cut interest rates and, in many cases, resort to money printing, Mr Stevens cautioned that too much is being asked of monetary policy.

Urging governments both at home and abroad to redouble their efforts to generate fresh economic growth, Mr Stevens pointed to last year's Group of 20 nations plan to boost global GDP by 2 per cent over five years.

The comments came amid ongoing market turmoil over Greece's collapsed debt negotiations with the European Union with EU leaders warning Greeks that a "no" vote at Sunday's shock referendum means saying goodbye to the euro and that a rejection of a critical bailout package could have dire economic consequences.

But the Chinese government seems to have steadied the country's sharemarket, after a series of aggressive interventions to boost shares, including allowing the country's $US493 billion ($641 billion) pension fund to invest in equities.

Speaking in London on Tuesday, Mr Stevens warned that the eventual return to more normal monetary policy settings was likely to be painful for many investors given central banks were now major players in financial markets after several bouts of quantitative easing.

"Central banks' balance sheet actions have become dominant forces in a wider range of financial markets," he said.

He noted that many critics believe the world's central banks have distorted the normal market pricing of risk and spurred an "artificial and dangerous" search for yield by investors.

"Central banks would counter that they had little choice but to pursue these actions and that, in any event, there are likely to have been some real factors at work in holding down real interest rates. Either way, some central banks seem likely to be large players in markets for quite some years. The manner and pace of eventual normalisation of balance sheets will surely, at some point, become a major challenge for private participants."

A BLURRING OF THE FINANCIAL LINE

In a speech that reviewed the evolution of central banking over the past three decades, Mr Stevens acknowledged the traditional distinction between setting interest rates and maintaining financial stability is becoming more difficult to manage.

In Australia's case, the Reserve Bank has been forced to cut the official cash rate to a record-low 2 per cent in order to maintain downward pressure on the currency and ease the blow from falling commodity prices. This has triggered a major surge in Sydney house prices and inflamed worries of a looming bubble and subsequent crash. Financial markets have also increased bets on another official interest rate cut by Christmas in the wake of the latest instability over Greece.

"It may be quite some time before the central banking modus operandi that we had prior to the crisis is seen again," he said.

"The role of central banks has become much more prominent, and at the same time considerably more complex and potentially more controversial, than it was in the calmer days of the great moderation.

"More has been asked of central banks, under circumstances in which monetary policy might reach the limits of effectiveness, and yet at a time when it seems the ability of other macroeconomic policies to contribute to growth has lessened.

"A previous generation of central bankers, who fought lengthy battles to rid their respective countries of high inflation, are surely looking on in disbelief."

Mr Stevens noted that another area in which central banks have changed is in their communications with markets, many now seeking to telegraph plans to keep policy stimulatory for longer.

"In their efforts to add power to their easy monetary policy stances, central banks have sought to offer 'guidance' on their future behaviour," he said.

"They have taken pains to spell out the sorts of conditions under which they would adjust policy and even given some sense of the likely pace.

"The forthcoming 'lift-off' by the Federal Reserve, when it happens, will surely be the most telegraphed monetary policy adjustment in history."

However, Mr Stevens quipped that many of the professional central bank watchers, journalists and analysts who report and weigh-up the importance of central bankers' "careful utterances" are at risk of distilling things down to a simple story.

He likened much of the central bank-watching industry to a new radio array in Western Australia, which will be able to detect the faintest energy from stars that are billions of light years from earth.

"Reading about that, one can't help but think of the financial markets. Countless market and media antennae are trained on the sound of the central bank voice, trying to discern and amplify signals out of all the static around, even when the central bank has no new signal to send, and static is all there is."

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Trillions being spent, but debt crises persist; It’s not just about Greece: Excessive borrowing hobbles many economies
By PETER EAVIS
1077 words
1 Jul 2015
International New York Times
INHT
English
© 2015 The New York Times Company. All Rights Reserved.
There are some problems that not even $10 trillion can solve.

That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. The tidal wave of cheap money has played a huge role in generating growth in many countries, cutting unemployment and preventing panic.

But it has not been able to do away with days like Monday, when fear again coursed through global financial markets. The main causes of the steep declines in stock and bond markets were announcements out of Greece and Puerto Rico.

And in China, precipitous stock market declines were also a sobering reminder that stubborn problems lurk in the global economy.

Stifling debt loads, for instance, continue to weigh on governments around the world. Greece’s government has repeatedly called for relief from some of its debt obligations, and Puerto Rico’s governor said on Sunday that its debt was ‘‘not payable.’’ Both borrowers are extreme cases, but high borrowing, either by corporations or governments, is also bogging down the globally significant economies of Brazil, Turkey, Italy and China. And economists say that central banks and their whirring printing presses can do only so much to alleviate the burden.

‘‘Monetary policy can only be a palliative,’’ said Diana Choyleva, chief economist at Lombard Street Research. ‘‘It cannot be a cure.’’

On Monday, the closing of banks in Greece ignited worries of a messy exit from the euro, and stock markets around the world fell sharply. On Tuesday, Greece said that it would not make a debt repayment to the International Monetary Fund that was due at midnight, and European markets declined again while indexes in the United States were stable in afternoon trading.

Wall Street’s avidly watched fear gauge, the VIX, spiked to its highest level in months, suggesting more turbulence ahead.

On both days, the market turmoil was greater in Europe. The stock markets of Italy, Spain and Portugal fell drastically. Ominously, each country’s government bonds also sold off, pushing up their yields, which move in the opposite direction of their prices.

The return of nervous selling on stock markets raises important questions about the health of the global economy. As central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros, markets in stocks and bonds, as well as other types of assets, have responded optimistically, sometimes reaching highs that were unthinkable seven years ago in the depths of the financial crisis.

Still, when everything is going well, it is easy to forget that there are limits to the power of the central banks, analysts say. ‘‘Basically, they haven’t got as much bang for the buck, or bang per euro, or bang per yen, as they were expecting,’’ Ed Yardeni of Yardeni Research said.

Central banks can make debt less expensive by pushing down interest rates. Crucially, though, they cannot slash debt levels to bring much quicker relief to borrowers. In fact, lower interest rates can persuade some borrowers to take on more debt.

‘‘Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,’’ the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.

Many countries are now in a position where their governments and companies live in fear of an increase in interest rates. A further rise in the government bond yields of Spain and Italy could cause a contraction in the fiscal policy of those countries, noted Alberto Gallo, head of macro credit research at the Royal Bank of Scotland.

‘‘This ‘involuntary tightening’ is what the E.C.B. does not want,’’ he wrote in an email, referring to the European Central Bank.

Even faster-growing economies are also vulnerable. Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago. This has prompted the Chinese government to pursue policies that expose more of the economy to market forces.

‘‘They have realized that they cannot continue like this — and that monetary policy doesn’t solve all problems,’’ Ms. Choyleva said.

Countries with seemingly high debt totals are not necessarily fragile. The United States government borrowed heavily after the financial crisis. But as the economy recovered, the debt proved to be manageable — and some economists contend that it helped stoke the economic comeback. Japan’s total debt is equivalent to 234 percent of its annual gross domestic product. Yet it has had no problems finding buyers for its government bonds over the years, defying gloomy predictions of some Western investors.

And some analysts contend that Europe’s debt problems are particularly acute because of the euro. Unlike Japan and the United States, countries in the eurozone cannot unilaterally loosen monetary policy and let their currencies fall to try and generate the growth that would then make it easier to pay off debts.

‘‘Greece needs far easier money than the rest of Europe and it can’t get it because it is locked in with the rest of Europe,’’ said Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics.

Forgiving debts is another way to lighten the dead weight on economies. Writing off debt can hurt banks, but defaults can also clear the system of doubtful loans and accelerate a recovery. Some analysts contend that extinguishing the mortgage debt of households bolstered the United States recovery. But lenders are not always willing to give big breaks to borrowers. Greece’s creditors have so far denied the country’s recent requests for debt relief.

And, in one of the most stressed countries in Europe, a grim standoff over debt is taking place. Ukraine is moving closer to default after creditors continued lending to the country despite zero growth and a corrupt and opaque political and economic system. Now, some of those creditors have resisted Ukraine’s demand they take a loss on their principal investment, preferring instead to extend the repayment period.

But last week, Ukraine’s finance minister, Natalie Jaresko, said a default was ‘‘theoretically possible.’’


International Herald Tribune

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Jul 7 2015 at 1:36 PM Updated 54 mins ago
Lower interest rates for longer is a risky strategy

Steve Johnson ... "a lot of today's asset prices assume interest rates will stay low for a very long time". Louie Douvis
by Steve Johnson

Investing is never easy. It's easy to say you need to be greedy when others are fearful. It is difficult to do so when there are genuine, rational reasons for fear. Likewise, we are told to be fearful when others are greedy. There are exceptions, such as the dot-com bubble of 15 years ago, but in general there is no flashing red light indicating when investors are being greedy. The current environment is a case in point.

The Bank of International Settlements' annual missive, released at the end of June, became famous after its pre-financial crisis warnings about the stresses building up in the global financial system. This year's version begins with a summary of the state of affairs: "Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for manoeuvre in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal."

That's hardly a backdrop for a bout of irrational investor exuberance, is it?

Asset prices around the world are extremely high relative to historic norms, though. Across all asset classes and most parts of the world, the returns on offer are measly. But most investors buying these assets are not doing so driven by greed, rather with a sense of reluctant resignation.

Ten years into the future, we will all be experts on whether 2015 was the right time to be fearful or not. As we sit here today, it's not straightforward. Are asset prices dangerously high, or are they simply a reflection of the interest rate environment?

DANGEROUS ASSUMPTION

Perhaps both. There's no doubt you can make a logical, rational case for equities and property relative to today's interest rates. The dangerous part is the assumption that those interest rates will stay at current levels. What just a few years ago would have been "unthinkable", in the words of the Bank of International Settlements, has become a "routine" assumption. Their concerns are worth quoting in full:

"For monetary policy, there is a need to fully appreciate the risks to financial and hence macroeconomic stability associated with current policies … a more balanced approach would mean attaching more weight than hitherto to the risks of normalising too late and too gradually. And, where easing is called for, the same should apply to the risks of easing too aggressively and persistently.

"Given where we are, normalisation is bound to be bumpy. Risk-taking in financial markets has gone on for too long. And the illusion that markets will remain liquid under stress has been too pervasive. But the likelihood of turbulence will increase further if current extraordinary conditions are spun out. The more one stretches an elastic band, the more violently it snaps back. Restoring more normal conditions will also be essential for facing the next recession, which will no doubt materialise at some point. Of what use is a gun with no bullets left?"

I don't like the bank's chances of influencing Federal Reserve chairman Janet Yellen and her compatriots around the world. It is not human nature to trade a short-term and known risk – derailing a fragile economic recovery – for a longer term and less identifiable risk – allowing financial imbalances to accrue. But the warnings are very pertinent for investors. Negative real interest rates are neither normal nor sustainable.

MORE PERTINENT THAN GREECE

"Normal" is itself only vaguely defined, but presumably it means positive real interest rates at the very least. A return to those, something like a 2 percentage point increase from current levels in the United States, represents a far bigger issue for financial markets than Greece defaulting on its debts or leaving the European Union.

From Australian houses to German government bonds, a lot of today's asset prices assume interest rates will stay low for a very long time. Unwinding that assumption could cause a lot of financial pain.

It's not all doom and gloom. The 9 per cent retraction in the ASX All Ordinaries Index over the past few months leaves Australian equities looking reasonably priced, especially given interest rates in this country are more likely to fall than rise. In Japan, dramatic changes in corporate culture have the potential to deliver substantially improved equity returns in that country. But the opportunities to invest at attractive rates of return are few and far between.

Whether or not you call it an interest rate bubble, we should all be treading carefully.