Introduction
The
world financial system is now more interrelated than ever. Financial markets
are seriously regulated whereas capital markets are expanding in Africa, Asia
and Latin America. The banking industry is going in the course of a
concentration process with less and fewer players left. Indonesia, Mexico,
Nigeria and Turkey are coming into focus after Russia, Brazil, China, India and
South Africa have let down. It seems that Europe countries are back in the
game, with Germany on the lead for recovery of the continent. On the other
hand, the US is still the world's mainly competitive economy, by
the IMD World Competitiveness Ranking.
The procedure of deleveraging the balance sheets of governments and companies
is under way. Government bond yields and interest rates are at past lows and
stock markets have improved to pre-crisis levels.
Therefore
what is there to be anxious about? There are eight likely scenarios that might
cause the next crisis, not any more significant or likely as compared with the
others. For some, prevention is straightforward. For others, some not sure
there is a big deal we be able to do.
1. Stock market
During
June 2013 and June 2014, world’s stock markets returned 18 per cent on standard.
Certainly, performance was rough, not dissimilar a "normal" year: the
market return was about 30 per cent in India, and in China 8 per cent merger. Though,
most companies that announced outcomes during 2014 let down markets, and mainly
large companies, stock markets have reacted negatively to annual earnings. The cause
is that, driven by overload liquidity and a lack of substitute opportunities, a
lot of cash has flown in to equity markets. The Yale University economics
expert and Nobel Prize winner Robert Shiller has discovered that the gap
between stock prices and corporate earnings is now bigger than it was in the
previous pre-crisis periods: 2000, 2007. If markets were to go back to their ordinary
earning levels, the standard stock market in the world should go down by about
30 per cent
2. Energy
An energy disaster now might not be caused by the shortage
of energy sources - rather the opposite. The expansion of frocking methods and
increasing supply of gas in the US has twisted shale gas into an effective
geopolitical weapon. If the US Congress were to let energy exports, world’s
energy prices would fall considerably. This might be great for companies, but
might generate geopolitical problems in Russia and West Asia. These countries
depended on energy demand from Western Europe and China, where energy expenses
are currently throbbing competitiveness and where a less-expensive alternative
might be welcomed with open arms.
3. New real estate
The
circumstances in 2005-07 that led to a real estate bubble have returned: low growing
demand, low interest rate and increasing real estate prices in a few markets.
With respect to the demand issue, in present market circumstances, the only good-looking
investments for institutional investors are equities and real estate. As a consequence,
prices are increasing.
Recently,
Bank for International Settlements has released information on real estate
prices in a number of markets from 2013. During, 2008 to 2013, housing property
prices enlarged by more than 60 percent in China, 80 per cent in Brazil, and in
Canada 15 per cent.
In
addition, there are uncertainties of a bubble in other countries such as UAE
and Switzerland. Similar to any other bubble, it would only become one time it
bursts. What is dissimilar in 2014 is that at the present central banks have enormous
tools to prevent real estate bubbles.
4. Corporate
The standard for companies is now to be BBB-rated. In the
US, there are merely three firms that still are AAA-rated: Johnson & Johnson,
Microsoft and Exxon Mobil. 61 were in 1982. As interest rates are low,
companies perceive the profit in debt financing. But this means that firms are too
more responsive to changes in interest rates. Usually a BBB rating is linked
with a likelihood of default of about 4%t in five years. So, we ought to anticipate
that in the next 5 years, about sixteen companies in the S&P500 index might
go bankrupt. One of them might be the new Enron.
5. Geopolitical:
From
Ukraine to Nigeria, and from Venezuela vs. Syria, the world danger map shows a
lot of hot areas where geopolitical actions might trigger a world crisis. Why
should anybody care regarding Syria or Ukraine? Because financial markets
tend react to political actions. And because, given the financial connection
among countries, negative sentiment in China might trigger a market fall down
in the US and vice-versa. Let us not fail to remember the outcomes of the Great
Wars.
6. Poverty:
During
last few decades the world has turned into wealthier and more flourishing.
While the proportion of the population in absolute poverty is at the moment at
its lowest height ever, the absolute figure of poor people continues to grow up.
In this background income variation is one of the social battles that we require
to fight. But the trouble with combating income variation is that the common
solutions (usually taxes) hinder the competitiveness of countries. This is one
of the long-term crises that will need smart guidance to shun inefficient
solutions.
7. Cash:
There
is great amount cash out there. It is the consequence of quantitative let-up
policies that central banks have followed. The surplus liquidity in the system
is determined among financial and non-financial organizations. More than four
hundred and eighty six billion US dollars in cash has Citigroup; Apple about
one hundred and fifty billion US dollars. It is paradoxical that, in a few
cases, banks and firms are so wealthy that they could purchase entire countries
(total GDP minus government debt). If the corporate segment were to unload such
enormous financial resources on to society, they might create hyperinflation
and consequently financial crisis. But otherwise we are in circumstances in
which central banks print money that they will have to get out of the system
later. We know how quantitative let-up works, but we do not recognize how to
exit from it.
8. Banking system:
One
of the main components of the banks’ transactions is shadow lending, it is more
than hundred per cent of GDP in the US, and about seventy per cent in China.
This is more of a crisis in China as compared in the US, due to two reasons.
First, in China the banking sector is protected from foreign rivalry - only
local banks are permitted to work independently in the country. As a consequence,
without any danger in a gigantic market, the leading banks in the world are now
Chinese. They are in fact too large to fail.
The
second cause is that a big element of Chinese shadow lending goes to central
government and provincial governments. Banking guideline in China is measured
to be very stringent, but we recognize what happens when regulators become
self-interested. Without a hesitation, the next banking crisis will be
triggered by a Chinese bank.
Conclusion
We
are at the present in a post-crisis stage. Yet, looking behind to between 1945
and 2008, we observe that the frequency of financial crises and recessions is
fairly high: at average, there is one crisis every 58 months (US National
Bureau of Economic Research). Using other words, statistically words we should
be expecting the start of the next crisis in April 2015, it would ending by
March 2016. That’s why we are in a post- or a pre-crisis phase? For some,
prevention is straightforward. For others, some not sure there is a big deal we
be able to do.
I
do not desire to be the holder of ill tidings, but I believe we should always
speculate what the cause of the subsequent crisis will be. There is no solitary
episode of financial crises in the previous 50 years that could not have been
prohibited. This time, let us look in front, not react after the crisis has
occurred.
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