Is 2018 the year of the next global financial crisis?
For Bill Gates, founder of Microsoft, the next financial crisis is just inevitable. During an interview on February 2018 hosted by the on-line social platform Reddit, Mr. Gates claimed that a global financial crisis similar to that triggered by the bankruptcy of Lehman Brother in September 2007 should be expected in the following two years. But which are the reasons behind Mr. Gates pessimism?
The Dow Jones Industrial average, the main stock index of the USA stock market, has increased by more than 65% in the last five years (2018), indicating a strong investor’s trust in the economic prospects of the global economy. The unemployment rate of the US economy decreased from 16% in 2010 to 4% in 2017, indicating a consolidation of both producers and consumers’ confident. The Non-performing loans in countries like USA and UK are less than 1,5% of the total credits, while countries like Russia try to keep this rate at less than 10%. The inflation rate in USA in 2017 was about 2% and in the main economies of Eurozone less than 1.5%. The regulatory framework introduced after 2007 for the support of the financial and banking system in the developed countries of OECD, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, seems to contribute to the creation of a more stable environment for financing. Nevertheless, the global economy is a giant with feet of clay.
The collapse of the Dow Jones at the end of January 2018 by more than 12% is just the first indication that we might be entering in the dark times of high volatility that might lead to the triggering of the next financial crisis. The iconic fund-manager Steve Eisman, whose famous story was transferred in the big screen in the film The Big Short, is pretty sure that the financial prosperity we are living now is close to its end. So which are the reasons that lead the biggest IT technology mogul and a notorious fund manager to believe that we are doomed?
As always, the answer can be found in global economy’s macroeconomic fundamentals and indicators. Let’s start with real economy and it main indicator, the unemployment rate. Unfortunately, the decrease of unemployment is attributed to the deregulation of the labor market and the rise of the part time vacancies, rather than increase of global consumption. In addition, a considerable number of long-term unemployedes gave up searching for a job by leaving the man power or compromising with a low pension. This is one of the main reasons why poverty surged in the majority of the developed countries.
A second worrisome factor is the rally of the global debt, which hit a record of $233 trillion in the third quarter of 2017. Even if we got used to the massive public debt of USA and Japan, with nervousness we are noticing the collection of debt by the traditional international creditors, such as China and India. The public debt of China reached 50% in 2017 in comparison with an average 30% during its golden two decade 1995 – 2015. This massive increase is driven mainly by the creation of a dynamic middle class, which inevitable is created by the increase of household and credit card debt.
According to Mr. Eisman the crisis will start from where it ended, in Southern Europe. The one million question is whether global investors will again be convinced, that Italy is “Too Big to Fail”! The Non-Performing loans of Italian banks are about 30%. Huge Italians banks, such as Banca Monte dei Paschi di Siena, failed to pass the European Central Bank crash tests even with the majority of their Non-performing loans still standing in their books. No need to mention the hustle and bustle that dominates in the country’s political scene after the confusing results of the Parliamentary Election in March 2018.
Nevertheless, central bankers seem to have harmed most the global economy. The central bank interest rates are extremely low in the majority of developed countries fueling no only the financial bubble but also the household debt bubble.
Having in consideration all these factors, investors should try to prepare an exit strategy is also to protect their wealth.