The Next Financial Crisis is around the corner.
I started flagging about the market’s anomalies in March 2018 in the post Eminent Crisis - Is 2020 the year? and the reason why I’m still investing in stocks up to now is because being early and right is the same as being wrong. But I believe the reckoning time is approaching. We can’t time it for sure but the probabilities of a market collapse are increasing.
“The market can stay irrational longer than you can stay solvent.”
John Maynard Keynes, Economist
If you think that you can hold on for longer so that you can surf the bull market a little bit more, read my post on Best $100 You Will Ever Waste. Most people overvalue negative amounts of money: they’ll work much harder to avoid losing a dollar than to gain one.
Therefore, you want to reduce your risks rather than chasing marginal returns.
Currency Wars
We’re for the first time ever in history experiencing negative interest rates which was inconceivable to Economists not long ago. The EU amidst low economic activity and Brexit uncertainty, followed suit on Japan’s strategy, lowering its interest rates to -0.5%.
Thus, the rest of world is pressured to keep all their rates low. The issue with that is when a crisis eventually arises, we won’t have much firepower to stimulate the economy as the main tool is interest rates.
See example of how the US fought its crisis by using interest rates.
As of Oct 2019, the US, Canada and UK have respectively, 2%, 1.75% and 0.75% interest rates and are leading the developed world. Emerging countries, even though they may have a high %GDP share, are expected to pay higher interest rates to attract capital due to being considered “riskier”.
Therefore, a good way to view whether a country is more or less risky than its peers is by comparing its weighted global rates. That way we give more importance to bigger economies because that’s just the way economics work. For instance, when the US had economic trouble in 2008, it quickly spread across the globe due to its strength of economy and how intertwined it is with other countries.
Methodology inspired by Measuring the ”World” Real Interest Rate by Mervyn King, David Low, NBER working paper, 2014.
The model is not perfect because the weighted average is calculated only off 68% of Global GDP Share rather than 100% and there are other variables involved such as historical number of “defaults” and local inflation, but it helps highlights anomalies such as Brazil. If you look at Brazil nominal rate (+5.5%), it is way higher than the average rate (+1.78%), but for the size of its economy not so much as its weighted average is 0.12%, slightly below the top 10 countries weighted average (0.15%).
In fact, India future cut rates will probably have greater effect than Brazil’s due to its weighted rate.
Worsening debt crisis
What was going bad isn’t being fixed: government, student, corporate and mortgage debts have reached all-time high’s across the board.
See that the second main tool that got us out of 2008 crisis was debt. But, this is also now exhausted given the exorbitant debt over GDP across developed nations.
The Giants are also slowing down
US and China have been in the news because of their Trade War, but what is even more startling is their slowdown. Official data shows that growth in the world’s second-largest economy slowed to 6% year-on-year in the third quarter of 2019 (China is well-known for having double digit growth in not so long ago). In the US, analysts expect growth in gross domestic product to slow to 1.7% in 2020. It’s yet not a contraction, but a mild slowdown can easily become worse when people get concerned.
It’s not hard for people to get concerned now since we’ve been in the longest bull market of the entire history (11 years since 2008). Any big uncertainty such as Trade War, Brexit or Asset Bubbles can turn the economy upside and hence why we should be looking into safer investments.