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FREE FALL Why it’s time to prepare for a new global crisis

crypto currency

The Bloomberg agency conducted a survey among stock markets leading experts about what could trigger a new financial crisis. As it turned out, external optimism does not interfere with bad forebodings. Among the potential triggers of economic collapse were the bubbles in China’s markets, Japan’s high debt burden, and the crypto-currency boom. And all the respondents agreed that the threat of collapse is real.

Global stock markets this year only update their records. This is especially noticeable in the US: the Dow Jones and Standard & Poor’s 500 indexes surpassed the highs reached before the 2008 crisis by about 80 percent. The last time so called “correction” was observed at the beginning of the last year and was a trifle. Stock indexes continue to grow for several years despite numerous predictions about the imminent deflation of the bubble.

Sometimes there is a feeling that a period of infinite growth has come. But exactly the same feeling was before all previous crises. Sooner or later, a collapse should occur, the only question is how strong it will be and what will serve as a direct trigger. In this regard, analysts interviewed by Bloomberg analysts have different opinions.

Quantum earthquake

Quantum or quantitative funds are called investment funds, where all investment decisions are made on the basis of mathematical models that do not take into account the influence of subjective factors. Such investment funds in recent years have brought greater returns than other asset managers, and have gained immense popularity.

Dow Jones

Meanwhile, the first call of the global financial crisis of the end of the zero was the collapse of similar funds, which occurred in August 2007 and was called the “quantum earthquake.” Then very few people paid attention to this, and for another six months the world market functioned as usual. Only the collapse of Bear Stearns in March made the financiers think. According to Clifford Esness, head of one of the largest quantum funds of AQR Capital Management, the fundamental prerequisites for the crisis are now much weaker. In particular, the level of indebtedness of market players is much lower. On the other hand, mass media attention to the stock market is much greater. The collapse of one of the players, including among the quantum funds, is able to create a “positive feedback”, when the influx of passions in the media is accompanied by negative response to what is happening of market participants. This way the wave of crisis will be dispersed.

crypto currency Bitcoin Bubble

The rate of the world most popular crypto currency managed to overcome the mark of $ 11,000. The index is unthinkable: at the beginning of the year, bitcoin cost about 2,000 and even then it was considered highly overrated. Having reached a market capitalization of $ 160 billion, it continues to disgrace the skeptics, and there are increasing voices that the virtual currency is unreasonably cheap. All this, however, we already learnt in the late 1990’s, when shares of Internet companies grew in a couple of years in tens, hundreds and even thousands of times. As a result, the bubble did burst, and the next 10 years the industry went to “lick the wounds”. In the long term, crypto-currencies can change the entire global financial system, but after experiencing several more ups and downs. And where is the guarantee that in 10 or 20 years bitcoin will remain the most popular crypto currency? Who now knows about AOL, the leader of the US Internet startup market in 1998? Bitcoin has serious money invested. Its collapse will lead to a mass flight of other crypto-currencies. A collapse can destroy the cost of hundreds of billions of dollars, and then the “conventional” market will suffer, and in the long term, the world whole economy.

Chinese problem

The China economy, although it has slowed down a bit, is still the fastest growing in the world. Globally, the current 6 % growth per year is much more than 10 percent in 10 years ago. China’s GDP per year is increasing by about 800 billion dollars (against 300-400 billion in the past decade). Accordingly, if the PRC economy suddenly stops growing, the consequences for the whole world will be enormous – the companies will lose hundreds of billions of dollars, which will inevitably lead to serious financial problems. Adding to this an imminent panic, and there will be a ready recipe for the global crisis.

Prerequisites for that are enough. The Chinese economy has grown 5 times over 10 years, but the volume of domestic debts has increased tenfold. This does not indicate financial health. The Chinese authorities are trying to blow out bubbles in the market, tightening regulation, but no success so far. It is believed that the world economic center is gradually moving from North America to East Asia. Hence, from there you can expect a crisis. Trigger applicants, including China, are enough. In Japan, for example, public debt is steadily approaching the astronomical index of 300 % of GDP. If Japan does not take measures to remove this debt canopy, the Land of the Rising Sun can finally disperse inflation. However, the acceleration will be such that it will bring no joy to anybody.

Revaluated companies

According to Goldman Sachs, the crisis is inevitable, at least because the shares of most companies are too expensiv. Investbank calculated that the ratio of the price of shares and profits in the US market is now at its highest levels since the beginning of the last century. The situation is aggravated by the fact that US government bonds are now extremely expensive, whereas earlier these figures were in antiphase.
A sharp revaluation of the shares value may cause an increase in the key rate. Analysts at Goldman Sachs, however, found it difficult to predict which level of the key rate would be truly dangerous.

Recessions just happen

The economy develops cyclically, and even long periods of growth are replaced by a strong fall. And the most severe crises occur after the most rapid ups – as, for example, in the 1920s. Now the rise has been sluggish. Even the US economy, the fastest growing one of the developed countries, has grown averagely 1.5% per year after the 2008 crisis (almost twice slower as before). But the duration of the period without recessions exceeds 100 months – this is one of the record indicators in the last 150 years.
This means that the US economy will inevitably find itself in a crisis, and in the not that far future. Considering actual situation, the collapse of markets and the spread of the recession to the whole world is a very short time question.

Whatever the cause of the new storm in world markets, the consequences for the Russian economy will be sad. First of all, the price of oil will fall, and the task of switching from hydrocarbon exports to a different model is far from being solved. Russia has only just begun to recover from its own domestic production crisis, and a second blow can lead to a catastrophe not only in the stock market, but also in the financial system, construction, industry – generally, in every sphere of the economy.

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