The warning signals that all are NOT well include major countries reporting slower economic growth, stock markets falling by close to 20%, gold prices going up by US$400 in 2 months to US$1,900 (now correcting back to possibly US$1,750), etc.
The last two years were NOT recovery, but they were just a temporary Bounce engineered by enormous printing of money through QE1 and QE2. (US$2.6 trillion printed) If QE1 and QE2 didn't work, QE3 (will definitely come, just don't know when and WHAT will it be called) will also fail.
U.S. constitutes 23% of world economy; Europe also constitutes 23%; Japan constitutes 5%. These three economies, totalling 51% of World Economy, are slowing down. Even if China (9%), India (6%) and ALL other economies grow, can they compensate for the 51% Drop? The Next Global Financial Crisis has probably already begun, just that many would NOT notice or feel anything until six to nine months later.
In my opinion, the next Global Financial Crisis is likely to be worse and more severe than the previous one in year 2008, why?
1. During the last crisis, governments throughout the world came to the rescue by borrowing money and printing money. As such, many countries had already borrowed quite a lot of money and there is limited room to borrow much more money to "rescue" the world in the next crisis. This poses a problem.
2. During the last crisis, governments throughout the world lowered interest rates to stimulate their respective economies. The problem in the next Crisis is that we'll have the issue of inflation. I.e. high inflation makes it difficult for countries to lower interest rates, as low interest rates will worsen inflation. The U.S. current inflation rate is 3.6%, which is higher than its average about 2% in the last 20 years; China's inflation rate is already 6.5%, and Singapore inflation rate is 5.2%. It is possible for U.S. inflation rate to go up to 5%, and when that happens, it is likely for the 10 year US government bond yield to spike up from current LOWEST level in history, yield of about 2.4% (or HIGHEST Bond Prices in history), to about 5%, and that might mean U.S. government bonds falling by over 50%! (A Bond Market Crash which didn't occur in the last Crisis.
3. Rising inflation and rising unemployment coupled with austerity measures (i.e. cut in social benefits) will lead to many more countries having social unrest and placing governments throughout the world in delicate positions.
4. When money stops to flow onto the streets, blood will flow on the streets...this is scary...
5. Throughout history, if we observe, when there are prolonged period of economic weakness, it will typically be ended by a War. The early 1900s recession was ended by World War I; The Global Depression which started in 1929 was finally ended with the beginning of World War II in 1938. So if history is any guide, we may see the trigger of a World War III should the next Global Financial Crisis resulted in prolonged economic slump and the next economic slump is likely to be longer and more severe due to reasons 1 to 4 as stated above.
I really do NOT wish such events will happen, but this is my latest view on what might happen in the next few years. I really hope I'm wrong, but I think what I analysed seems quite logical.
Category: Investment | 1 Comments