Will Financial Markets Crash – Compare and Contrast
China’s stock market has fallen sharply over recent weeks despite measures by officials in Beijing aimed at calming investors’ jitters and shoring up global confidence in the country’s slowing economy.
Shares in China had soared 150% in the 12 months to mid-June as individual investors piled into the rising market, often borrowing heavily to do so. The momentum came to a shuddering halt when shares hit a seven-year peak. Following another plunge on what was dubbed “Black Monday”, China’s stock markets have now given up all their gains for the year.
Shares around the world followed China’s stock markets lower. About £74bn was wiped off the value of the FTSE 100 and on Wall Street, the Dow Jones Industrial Average slumped by a record of more than 1,000 points at one stage.China’s shock move to devalue its currency, the yuan, this month only served to intensify worries about the world’s second-largest economy.
Some economists see limited risk to China’s real economy from the stock market turmoil and little to be worried about beyond China.
But others are less sanguine. They point out that China’s slowdown is just one of many factors worrying investors alongside lingering political problems in the eurozone, signs of weaker global growth and vast sums flowing out of fragile emerging markets such as Brazil. Furthermore, policymakers have few tools left to help.
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Many comparisons have been made with the financial crash of 2008 – but are they fair? We don’t think so. It’s worse.
- Markets and central banks feared a continuation of inflation as oil had hit $145 per barrel in the summer of 2008. The Oil price has crashed and now tests the $40/barrel level, markets and central banks fear the complete opposite – deflation.
- According to Bloomberg, outstanding loans for companies and households stood at a record 207% of gross domestic product at the end of June this year, nearly double the 125% level seen in 2008.
- Central banks around the world had a full toolbox of unprecedented monetary surprises to unleash on the markets – rescue packages and credit guarantees, quantitative easing (QE), zero interest rate policy (ZIRP) and direct purchases of mortgages, to name just the top few. Now, the central bank toolbox is empty: every tool has already been deployed on an unprecedented scale. The world economy has not significantly got better – in fact, even with the kitchen sink thrown at the problem, growth has failed to materialise.
- Back in 2008 central banks had a relatively clean slate to work with. Interventions in the market and economy were limited to suppressing interest rates in the post-dot-com meltdown era. Ever since, central banks have never stopped intervening, sure signs of desperation. The global market is in effect a reflection of nearly 7 years of unprecedented central bank interventions. Central banks face a market place that is dominated by incentives to speculate with leveraged/borrowed money established by 6 years of central bank policies.
- The Fed Funds rate in 2006-07 was above 5%, and the Prime Lending Rate exceeded 8%. Bank of England base rates at the start of 2008 were 5.5%. Today The Fed Funds Rate has been screwed down to .25% for 6+ years–and BofE rate to 0.5%, the lowest since it started in 1694 and an unprecedented period of artificially reduced rates.
- Average mortgage rates in the US and UK were around 6% just before 2008. Property markets around the world overheated heavily contributing to the global financial collapse. Today, house prices are higher in the UK than they were in 2008 fuelled by cheap rates and government stimulus packages (another intervention). Worse, mortgage debt is now higher and government assistance can only be viewed as supporting sub-prime debt as well over one million British home owners are unprepared for interest rate rises – which are inevitable.
- The global reserve currency – the U.S. dollar fell sharply from 2006 to 2008, and again in 2010 to 2011, boosting the overseas profits of U.S. corporations that account for 40% to 50% of total multinational corporate profits. More recently, the rising dollar has crushed the overseas profits of U.S. corporations. The soaring USD has also crushed emerging market currencies and stock markets, and forced China to devalue its currency, the the RMB (yuan)–a devaluation that triggered the current global meltdown in stocks.
- The global boom 2003-2008 was widely viewed as a tide that raised all ships, everyone believed it was going to go on forever. The subsequent collapse has seen inequality rise sharply. The middle classes have been decimated with falling real terms incomes, reliant on credit to get through each year. That tsunami of credit is about to dry up as governments have run out of cash to give to banks.
The man who called nearly every major economic trend over the past 30 years…including the 1991 recession, Japan’s lost decade, the 2001 tech crash, the bull market and housing boom of the last decade and, most recently, the credit and housing bubble has issued a startling new prediction.
“The DOW is going to crash to a degree we haven’t seen since the Great Depression” say world-renowned economist Harry Dent.
In fact, Dent says, “We’ll see a historic drop to 6,000 (it crashed to 7062 at the height of the last collapse in 2008)… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse. Gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly.”
“This is not fun and games. This is not fear-mongering. This is today’s economic reality” he plainly states.
Want more proof? Over the last couple of years, Warren Buffett’s holding company, Berkshire Hathaway, has been dumping its exposure to American stocks that rely on consumer spending – literally billions of dollars of shares have gone from its portfolio
Here are 11 more such predictions.
Finally, Gerald Celente of the Trends Research Institute said – “Rarely do I ever put a date on market crashes. I did it in 1987 when I forecast the 1987 stock market crash — that was in the Wall Street Journal. I also forecast the ‘Panic of 2008,’ and the ‘dot-com bust’ in October of 1999, when I said it (the dot-com mania) would fail in the second quarter of 2000….” Celente says that it won’t just be U.S. stocks either. He believes that crashes are also coming to “the DAX, the FTSE, the CAC, Shanghai, and the Nikkei”. It other words, it is going to be a truly global financial crisis and he says that there is “going to be panic on the streets from Wall Street to Shanghai and from the UK down to Brazil”.
Economic conditions are clearly now less resilient, more fragile and more dependent on unprecedented central bank interventions. How many useful interventions are left to central banks this time around?