High Equity Market, Rising House Prices & Low VIX Are Sources Of Concern
The Former Chief Economist for the Bank of International Settlements (BIS) said the markets are repeating the patterns of nine years ago. William White of the OECD warns that there are even more reasons to worry about a crash now than there were before the financial crisis of 2008 .
White, who is now the Chairman of the OECD Economic and Development Review Committee, noted that the prices of financial assets are too high. He also remarked that the volatility index (VIX index) is too low. (Source: “OECD Economist Warns of Greater Dangers Than Before Financial Crisis,” Newsmax, September 13, 2017.)
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Those who have been following our opinions at Lombardi Letter know that we share the OECD’s sentiment. A combination of a global financial crisis and a recession represent the logical outcome of the markets’ excessive exuberance.
Also Read: The Analyst Who Nailed the 2008 Financial Crisis Has a New Warning
As William White of the OECD observes, the situation has indeed gotten to a point where we’re seeing the financial crisis of 2008 all over again. No financial analyst can honestly explain the dichotomy that exists between most Americans’ apparent concern about Donald Trump’s performance as president and their enthusiastic stock-buying activity.
Usually, deep political mistrust implies fear of a systemic collapse. If Americans’ current political confidence matched their investment confidence, President Trump would have the highest ratings of any U.S. president ever.
Either many Americans secretly like Trump—especially some rich hypocrites in Silicon Valley, who are raking in billions of dollars now—or the right hands of too many Americans don’t understand what their left hands are doing. Judging by the reception of Hillary Clinton’s new book and the widespread criticism from many authoritative reviewers, I suspect the second hypothesis is more accurate.
Also Read: Warren Buffett Indicator Predicts Stock Market Crash in 2017
The Markets No Longer Have Any Logic
Simply told, there are too many strange developments in the markets. The prices of many financial assets are astronomically high—especially high-yielding assets. Meanwhile, volatility is very low, which means that, in too many cases, investors are buying stocks at their highest price ever. Meanwhile, in an eerie deja-vu from the period preceding the September 2008 stock market crash, house prices are also rising fast.
The stock markets have reached peaks that are too high, and investors will soon run out of oxygen.
The causes of the next financial crisis—that is, the likely financial crisis of 2017—are many. But there are a few clearly identifiable problems that should be sounding alarm bells rather than the enthusiastic bell that alerts the start of trading on the floor of the New York Stock Exchange (NYSE). Some of the factors that could trigger a massive financial crisis in 2017 include Asia’s debt burden.
Asia is not just about China. India, like China, has a huge debt dilemma. India’s debt has far-reaching roots, and there are many unresolved problems at the governance level, primarily for state-controlled banks. Then there’s China. The OECD warns that China’s debt situation isn’t much better than India’s. Lending and growth have occurred with equally excessive speed.
White warns that it’s not just the level of debt that is worrying, but the speed at which it is accumulating. Many of those loans will never be returned. A banking crisis in China would spark a massive sell-off in the Chinese markets on a scale bigger than what we saw in the summer of 2015. That would be enough to trigger a domino effect, reaching Wall Street in no time.
It’s Only a Matter of Time Before Next Major Market Crash
The trigger for the potential financial crisis of 2017 (or 2018) could very well be debt. Central banks have looked for every excuse to avoid lifting interest rates. The Europeans still haven’t raised their rates, but they’re actually seeing some real economic improvements. Countries like Portugal, Spain, Italy, and even Greece are showing higher-than-expected economic growth figures. But their stock markets aren’t quite as expensive as Wall Street.
At this point, less-experienced investors should ask themselves how the more seasoned ones might react. Those who remain interested in investing in the long term should be asking themselves if it still makes sense to take on so much risk. Would it make more sense to switch to less-volatile solutions such as gold or other precious metals?
There’s no doubting the level of temptation and its effects on greed. Stocks on Wall Street are flying; it’s only common sense that investors at all levels of experience want to get some of the action and the potential profits. But those who play the long game cannot ignore the fact that the chickens eventually come home to roost. Apart from the interest-rate risk, there are geopolitical and economic issues that could also terminate the bull market. North Korea has not budged; sanctions and threats haven’t worked and the White House might be forced to take action.
Meanwhile, in Syria, the Kurds are going to hold a referendum on independence. If the “yes” vote wins, neighboring Turkey will feel its sovereignty threatened, sparking yet another Middle Eastern war even as the others haven’t finished yet.
And the icing on the cake is the United States public debt having surpassed the psychological threshold of $20.0 trillion.
