Category Archives: Financial Crisis

Generational Chaos Ahead | Mauldin Economics

“… fact remains that there are forces in the world today that are aligned to bring about a pretty damned serious global crisis and recession.”

The Worst Yet to Come

So after Neil Howe explained all this at the conference, it was time for questions. Naturally I voiced the question that we all want to know the answer to: “Will the Crisis be over soon?” Neil’s answer was succinct, and not encouraging. He thinks we are only halfway through; and if the next few years play out like past Fourth Turnings, the worst is yet to come.

Why?

Right now we are in a period that roughly parallels the 1930s. Then, Franklin Roosevelt was battling the Great Depression with vast public works and relief programs. Could we do the same now?

We could, yes, but we have a problem. FDR had room for fiscal stimulus because government debt was minimal. That is clearly not the case now. The next recession, which would precipitate the next portion of the Fourth Turning Crisis, will see our national deficit balloon to $1.5 trillion; and with the off-balance-sheet requirements, the national debt will grow by $2 billion a year, quickly bringing us to a $30 billion total debt.

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The government is in hock up to its eyeballs, and the Federal Reserve has used up most of its monetary policy tools. There is little room to add public spending in one sector unless we take it away from another.

And the developing Crisis is not just a US problem. Europe is coming to realize that it faces an existential crisis; in Japan Abenomics is losing credibility; and China is well into a period of severe financial and cultural struggle. The emerging markets will be tossed to and fro on the whims of financial flows. Yes, there will be great technological leaps forward, and over the next decade or two we will see three billion people move into the middle class around the world – which will create an even greater potential for cultural change worldwide.

It is important that we understand the times we are in. Is our fate sealed? No, not in the sense that we are all doomed and there is nothing we can do about it. We are going to live through a period of stress and crisis. Coincidence? Some will argue so, and maybe they are right. Some argue that seeing history through a generational lens is shaping the facts to meet your story. Okay, you can have whatever narrative you want, but the fact remains that there are forces in the world today that are aligned to bring about a pretty damned serious global crisis and recession.

Generational Chaos Ahead | Mauldin Economics

Why US financial markets may not be immune to Brexit’s ripple effects | Money | The Guardian

Laurence Wormald, head of research at FIS, a financial technology company, has run a “stress test”, or a hypothetical scenario analysis, and calculated that if Britons vote in favor of Brexit, the S&P 500 would fall 5% and banking stocks would fall 8%, while volatility in the broader stock market would soar 40%.

That’s the simple and straightforward scenario, however. If such a Brexit vote prompts other anti-EU parties in other countries to renegotiate their relationship with the European Union, that would create what FIS refers to as “exit contagion”. That would send British stocks down 20%, European stocks down 15%, and US stocks down 10%; volatility in British and European markets would double, and in the US market it would soar 60%. That would make the stock market a very, very uncomfortable place to be for the remainder of the year.

Why US financial markets may not be immune to Brexit’s ripple effects | Money | The Guardian

We’re headed for 1938 all over again – Business Insider

Sound familiar?

Well it should, says the Morgan Stanley global strategy team of Chetan Ahya, Elga Bartsch, and Jonathan Ashworth. In fact, the team said in a note to clients Wednesday that nearly the same situation that occurred in 1937-38 is currently happening in the US.

“The critical similarity between the 1930s and the 2008 cycle is that the financial shock and the relatively high levels of indebtedness changed the risk attitudes of the private sector and triggered them to repair their balance sheets,” wrote Ahya, Bartsch, and Ashworth.

“During the deleveraging process, the private sector becomes risk-averse and shifts its attention towards restoring health to its balance sheets.”

We’re headed for 1938 all over again – Business Insider

World faces pensions crisis, warns OECD

The global pensions crisis has been laid bare by new analysis that shows people retiring today can expect half the income of those who became pensioners at the start of the millennium.

The stark findings by the Organisation for Economic Co-operation and Development (OECD) will be presented in a report this week that highlights the impact of ultra-low interest rates on global retirement incomes.

It shows that a person buying an annuity today who saved 10pc of their wages into a pension for 40 years can expect just over half the earnings of someone who saved the same amount but retired 15 years ago.

World faces pensions crisis, warns OECD

GEORGE FRIEDMAN: A crisis is brewing that will tear the global system apart – Business Insider

The crisis that unfolding is a crisis of exporters. Oil exporters (Russia, Venezuela and others) are in trouble. China is in trouble. Germany is headed for trouble. Their economic model based heavily on exports is breaking as demand is dropping off a cliff and won’t be coming back for a long time.

The global system has reached a breaking point. All the pressures that have built up over the months and years have finally begun to tear it apart.

There is much to tell, but for today, I will mention only three countries: China, Saudi Arabia, and Germany.

From 1991 to 2008, the consensus was that more exports make an economy stronger. This was true until 2008. However, the exporter is only as strong as his customer’s appetite and ability to buy what he sells. When demand falls, what was once a strength becomes a weakness.

The financial crisis of 2008, followed by the recessions in Europe and the United States, was the first step in this shift.

GEORGE FRIEDMAN: A crisis is brewing that will tear the global system apart – Business Insider

Neil Howe: It’s going to get worse; more financial crises coming

China’s debt bubble is getting only more dangerous – The Washington Post

It would be like finding out Warren Buffett’s financial empire may have been, quite possibly, a sham.

That’s what happened last year when China’s richest man — at least on paper — lost half of his wealth in less than half an hour. It turned out that his company Hanergy may well just be Enron with Chinese characteristics: Its stock could only go up as long as it was borrowing money, and it could only borrow money as long as its stock was going up. Those kind of things work until they don’t.

The question now, though, is how much the rest of China’s economy has come down with Hanergy syndrome, papering over problems with debt until they can’t be anymore. And the answer might be a lot more than anyone wants to admit. Although we should be careful not to get too carried away here. Hanergy is now a nothing that used debt to look like a very big something, while China’s economy actually is a very big something that is using debt to look even bigger. In other words, one looks like a boondoggle and the other a bubble. But in both cases, excessive borrowing — especially from unregulated “shadow banks,” such as trading firms — has made things look better today at the expense of a worse tomorrow.

China’s debt bubble is getting only more dangerous – The Washington Post

The cause of the next financial crisis might surprise you: US house prices

The next bubble could be in the most dangerous asset of all – again

What’s really interesting is that Grantham reckons US house prices might be at risk of moving back into bubble territory. In fact, they’re pretty much already there.

Grantham defines a bubble as any asset that moves to two standard deviations above its long-term average (in other words, it rises a long way above its historical trend).

As of the end of last month, the ratio of the median US house price compared to the median family income was one and a half standard deviations away from its long-term average (going back to 1976).

The cause of the next financial crisis might surprise you: US house prices

This is how the next financial crisis will spread around the world economy | Voices | The Independent

A new economic crisis, which I believe we are on the brink of experiencing, will have similarities, and differences, to 2008. The problem of crowded trades – where market participants all have the same basic positions and strategies, and identical risk models – will be familiar.

To recapitalise banks, regulators have approved risky hybrid securities, such as contingent capital and bail-in bonds. In the event of a systemic crisis, losses will be transmitted to insurance companies, pension funds and private investors; bailing them out may be politically necessary or expedient.

The combination of size, the nature of the underlying assets and the redemption feature may prove especially toxic. It is simply not possible to transform highly illiquid instruments, using financial engineering into liquid equivalents. This lack of liquidity is not reflected in pricing, with the premium for liquidity risk in most segments having fallen to 2007 levels of below.

Financial market shocks flow through into the real economy, affecting the supply of credit, growth, investment and employment. In turn, this feeds back into further sovereign and financial sector weakness.

The exact sequence of events is unpredictable because of the complexity of transmission pathways. But once these feedback loops start, they are very difficult to control.

This is how the next financial crisis will spread around the world economy | Voices | The Independent