“When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity”— John F. Kennedy
Street riots, mass panic, nationalizations and social unrest, which the world has not seen in the last 50 years — in such terms describes the future of the American and global economy, the leading analyst of the Bank JP Morgan (US) Marko Kolanovic. In honor of the tenth anniversary of the global financial crisis in 2008, Mr. Kolanovic issued a special analytical report, which shows that the world financial markets are now vulnerable to a new crisis to an even greater extent than it was ten years ago. In case of realization of the negative of the presented scenarios the crisis is so spreading that for the sake of economy Central banks even have to spend the actual operation of nationalization of the most affected companies by buying their shares on the market.
Such a negative prediction, which was also formulated in the most unflattering terms and filled with harsh criticism of the regulators of American and world financial markets, it would be easy (but wrong) to write off the desire of another analyst to gain the glory of the prophet or the media attention — especially since such apocalyptic forecasts usually do not come true. The problem is that there are regular analysts, famous analysts, experienced analysts and, there is Marko Kolanovic. The prediction of the past events attracted the attention of the world business media precisely because it has a well-deserved reputation of a person who is not prone to excessive pessimism, but who sometimes accurately predicted previous problematic episodes in the world markets. One can understand the logic of journalists: a person who has predicted several small crises can be quite capable of predicting the emergence of a large one.
Moreover: in the leading analysts of the Bank JP Morgan, which manages assets of $ 2.7 trillion and is traditionally considered a “Family Bank” Rockefeller, random people do not fall and, accordingly, Kolanovic himself has a reputation of a kind of “mathematics-clairvoyant”, which calculates the movement of markets as well as astronomers calculate the movement of the planets.
The argument of Kolanovic, who was the candidate of the physical Sciences before the desire to earn the really big money forced him to go to work on Wall Street, reduced to a few theses that are associated with the vulnerability of the current structure of financial markets.
In the ten years since the 2008 crisis, there has been a dramatic increase in the number of exchange transactions and financial decisions made by automated computerized systems. It should be emphasized that these decisions are made without human intervention, in just a fraction of a second. According to Aite Group, quoted by the Economist in 2014, approximately 65% of transactions in the US stock market are made by computer algorithms, not people. Kolanovic has already described several mini-crises (for example, in February of this year, when the American market for no apparent reason lost a few percent a day), which were caused by the “herd behavior” of computer programs, tossing trillions of dollars. The fact is that almost all of these programs have instructions that can be translated into human language as follows:
“if something strange or unusual happens, sell everything right now”.
The result is a chain reaction, in which some external shock first “panic” some computers, starting to sell their portfolios of shares at any affordable price, then it is noticed by other computers, which also begin to sell — and so on, to a complete collapse of the market.
In the past, such situations were stopped by people who went to the market to buy suddenly cheaper shares, but over the past ten years, almost all of them were fired as unnecessary. Moreover, they cost much more expensive than computers, which do not have to pay salaries, pay for vacations and for which it is not necessary to make pension contributions.
Such a chain reaction Kolanovic calls the “Great Liquidity Crisis” and suggests that the radical measure of struggle will be once again used the printing presses of the Central banks, with unpredictable social and economic consequences.
It could be assumed that such a crisis will be very short-term and eventually people will bring order to the market, as a result of which everything will be restored. But this will only happen if the very external shock that triggers the initial chain reaction turns out to be short-lived. The problem is that if the shock turns out to be systemic, the market will no longer be pumped out by conventional methods.
In this context, it is useful to look at another prophet of the crisis — the chief economist of the rating agency Moody’s Analytics Mark Zandi, who (also under the “anniversary” of the crisis in 2008) published an analytical note outlining the likely scenario of the shock, which may well lead to a recurrence of the Global Financial Crisis.
Mr. Zandi claims that last time the crisis began in the real estate market and then spread to the entire financial sector and the economy as a whole, but this time the epicenter of the crisis and the point of beginning a chain reaction will most likely, will be for highly leveraged US companies. This assessment is due to the fact that the monetary and regulatory policies of the United States over the past ten years have led to the fact that instead of a mortgage bubble, a bubble of lending to “garbage” companies appeared, which, with a stricter monetary policy, should not have easy access to borrowed funds.
Potentially toxic debts US companies of highly leveraged are about 2.7 trillion dollars and are growing rapidly-are floating-rate debts. And with a further increase in the Federal Reserve rate, both these companies and their creditors will fall like dominoes. Economist Moody’s emphasizes that it is still too early to confidently assert that it is these toxic debts that will lead to collapse, but the similarity of the situation with the threshold of the crisis of 2008–2009 leads to unkind thoughts.
It is noteworthy that Moody’s has already attracted the attention of its customers to the fact that America is facing an unprecedented “wave of corporate defaults” of “garbage companies” and this “shaft” will lead to serious negative consequences for the economy as a whole. It is not difficult to guess that as a strong external shock that will cause stock market panic, such a “default Tsunami” fits just perfectly.
It should be noted that the crisis will be the worst in history at once due to several reasons:
1. Record high value of margin debt in both absolute terms and in relation to the total volume of trades
That is, it can be argued that the entire growth of US stock exchanges is provided solely by trade in debt. As evidenced by another graph.
It should be noted that the NYSE, without any explanation, stopped publishing data on margin debt as early as December 2017. Therefore, we now use data from third-party auditors.
2. Record low risk hedging
That is, traders from the beginning of the year almost ceased to insure risks (for quite understandable and explainable reasons — the fall in profitability and lack of available funds).
Unprecedented bloated bubbles. Even the bubble of derivatives in 2008 compared to the current one is a “baby”.
Record high involvement of companies, pension funds and households in trade in the markets. And even manufacturing companies have directed a significant part of their working capital not to ensure production, and threw into the furnace of exchange speculation. That is, in the event of a collapse of the markets will suffer literally everything and “all the money”.
3. And here is where the fun begins. Because the last few months have seen unprecedented values of investments in the short position of the trader. Someone’s shorting like a madman. Getting ready to cash in on the dollar collapse.
Similarly, the VIX volatility index is shortened, expecting a sharp jump characteristic of crises.
The U.S. economy has a greater than 50–50 chance of tipping into a recession in the next two years, according to a model tracked by JP Morgan Chase & Co. The probability of a U.S. recession within one year is almost 28 percent, and rises to more than 60 percent over the next two years, researchers wrote in a note. Over the next three years, the odds are higher than 80 percent, according to the note.
Due to the fact that the modern world economy is highly integrated, in the case of the beginning of the next crisis in the United States, even the countries that have nothing to do with its genesis will suffer, like last time. This is the nature of globalization.
But, unlike in 2008, in the case of another crisis, many countries will necessarily have a desire to turn globalization back, and if possible, to isolate Washington in the Americas and rid the rest of the world of its indisputably toxic political and economic influence…
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