A former Goldman Sachs chief executive says financial markets have gone unusually long without the kind of crisis that forces investors to confront the real value of their assets.
In a new interview with Bloomberg, Lloyd Blankfein says the global financial system has not experienced a true market “reckoning” since the 2008 financial crisis.
Blankfein says that historically, financial markets often witness disruptions every few years that force investors to sell assets, raise cash, and reassess balance sheets.
“We haven’t had a reckoning in a long time. What do I mean? What’s a reckoning? We haven’t had some disaster that forced people to sell things that they didn’t want to sell, accumulate cash capital, find out and have to discover what the value of the inventories that they’re accumulating in their balance sheets.”
He notes that the absence of such events has stretched far beyond the normal cycle.
“We haven’t had that in a while, and the longer it takes, really not since the Global Financial Crisis. That was a long time; 2008 was a long time ago. Usually, we had these things every four or five years. I could tick through them. But we had them, and we haven’t had it for a long time.”
According to Blankfein, long periods of easy money and low interest rates often weaken discipline in financial markets.
“Because we haven’t, the sheer fact that we haven’t had it for a long time means there’s undoubtedly a lack of discipline. Interest rates were very low for a long time, so investments were made. Anytime the commodity is free, you’re not husbanding it and you’re not disciplined about it.”
He says that eventually markets will be forced to discover the real value of assets that have accumulated during this long cycle.
“You know that there must be things out there that nobody’s been forced to sell, nobody’s been forced to price discover, and at some point, the longer the reckoning takes, the worse it’s going to be.”
Blankfein says his base case remains positive for now, but warns the cycle will eventually reverse.
“My base case is wind at our back. But eventually, it will come to an end, and people will have to take stock of what the assets that they’ve been accumulating and had the notion of what the value was. Those things are going to have to pour into the market, probably at the least convenient time.”
Disclaimer: Opinions expressed at CapitalAI Daily are not investment advice. Investors should do their own due diligence before making any decisions involving securities, cryptocurrencies, or digital assets. Your transfers and trades are at your own risk, and any losses you may incur are your responsibility. CapitalAI Daily does not recommend the buying or selling of any assets, nor is CapitalAI Daily an investment advisor. See our Editorial Standards and Terms of Use.