Did we just feel the warning tremors of the next financial crash?

Last week, tremors that had been rumbling through the financial markets since the turn of the year came to the surface.

Last week, tremors that had been rumbling through the financial markets since the turn of the year came to the surface.

The New York stock market dropped over 2 per cent on Friday and the Tokyo stock market fell 2.5 per cent on Monday, dropping 8 per cent in three days. The Argentinian currency, the Peso, fell by 15 per cent in a day and was quickly followed by the currencies of Turkey, Brazil, South Africa, India and Russia.

The reason behind this fall was that three big economic stories of the last few years were unravelling into one: China, shadow banking and Quantitative Easing (QE).

On Friday, a Chinese trust investment fund with the descriptive name ‘Credit Equals Gold No. 1’ – a half a billion dollar fund – appeared to be on the verge of defaulting, but after immense volatility a deal with those originally refusing to bail it out was done.

Whether this is seen as satisfactory the damage has been done in exposing the dangers related to the Chinese shadow banking system which consists of $4.8 trillion, according to Moody’s, of undeclared risk – equivalent to half of Chinese total GDP. And to those who believe the trouble has passed, Kevin Lai, an analyst with Daiwa Capital Markets, had this to say: “We believe recent trust troubles in China are only the tip of the iceberg”.

When coupled with the fact that it was the weakening of the Chinese economy that has exposed this risk the similarities to Lehman Brothers and the US in 2007/8 have, to quote George Soros, “eerie resemblances”.

We are now also seeing the real effects of the slowdown of QE by the US Federal Reserve. We have long been aware that QE was landing on “Wall Street” and not “Main Street”, with cheap money moving into asset purchasing of both shares and riskier investments. With the US recovering and the developing world faltering, in particular in the wake to Chinese growth fears, this money is going home to the US in a big way – the emerging markets have suffered 13 weeks of negative capital outflows from their countries.

What this means for the developing world in the short run is a currency crisis, but may soon become a full on credit crunch, meaning investment, the life blood of development, going into reverse.

That developed countries will come out of this unscathed is debatable, with QE causing shares to ‘melt up’; stock markets are overpriced by almost all indicators; the respected Shiller CAPE index shows earnings to price ratios nearing 2007 pre-crash levels (see chart).

Black Tuesday-JPEG

With companies in the UK issuing record profit warnings rather than record profits, the likelihood of companies reaching a decent price to earnings ratio without a large price correction seems unlikely.

The self-fulfilling prophecy of markets is also a well-known factor: it was only a month ago that Goldman Sachs advised clients to reduce emerging markets assets by a third, which now is looking clever, but may also be seen as clever manipulation of the market.

All of us who see markets as imperfect will know that predictions of the future of the market can never be sure: Chinese intervention on shadow banking or a Federal Reserve increasing QE spooked by market reaction could mean any correction is years away.

However, we do seem to have had a glimpse of where the tectonic plates of the world economy are shifting and where future pressure points may lie. That these are the same pressure points which were exposed in 2007 is depressing, but how a still fragile global economy will cope with another financial crisis is the real worry.

10 Responses to “Did we just feel the warning tremors of the next financial crash?”

  1. Sparky

    Ranjit Sidhu -do you have any qualifications or professional experience in economics or financial markets?

  2. LB

    7,100 bn of pensions debts, borrowing, PFI, why won’t Labour discuss the debts they have run up?

    Ah yes, they want to extract as much money from the public before it goes tits up and then blame someone else.

  3. LB

    I doubt it.

    He thinks all migration is great.

    Quite why Abu Quatada is great for the UK is beyond me.

  4. Ranjit Sidhu

    Financial Times, Today 29 Jan: “US stock markets have opened sharply lower …the gradual withdrawal of stimulus by the US Federal Reserve is exacerbating challenges faced by emerging economies including South Africa and Turkey.”

    Sparky when I write on immigration you commented on my name as invalidating my argument and now this , I hope you start playing the ball rather than the man. LB as per above.

    Thank you for your comments.

  5. Fabian Vanham

    Where is this 7.1 tn figure coming from? Last I checked, if you include the hidden costs such as PFI, the figure is around the 1.2 tn mark and rising, whilst the current government deliberately conflate debt and deficit to pull the wool over the eyes of the electorate. Labour are guilty, but hardly alone in bearing the blame, what with the complicity of their opposition when out of power, and the continuation of said madness when in power.

  6. LB

    http://www.if.org.uk/archives/2031/ons-reveals-full-uk-pension-liabilities

    The results showed the extraordinary sums that Britain has committed to pay its future retirees. In total, the UK is committed to paying £7.1 trillion in pensions to people who are currently either already retired or still in the workforce.

    ========

    Why have you ignored the pensions and equated borrowing with debt?

    It’s one of the tricks.

    I agree entirely with the debt deficit confusion.

    There are other tricks.

    Percentage of GDP is another.

  7. LB

    I’ve played the ball.

    Abu Quatada? Good for the UK or not?

    Are you going to play football or not on that matter?

    If you want other questions

    1. How much tax does a migrant need to pay in order to be an economic benefit?

    It’s not in the CREAM report., its studiously avoided

    2. Should migrants pay a fair share of the common goods such as defence?

    Or should we do as the CREAM report does, and say that migrants pay nothing, and the Brits pay it all

    3. Should migrants get pensions for free?

    The CREAM report ignores the cost of pensions.

  8. Sparky

    I used your name to draw attention to the fact I was addressing you.

    By the way, the man is the ball. The people who write the articles on these pages universally have no qualifications or experience of business or economics. They work as professional ‘bloggers’, think tank policy researchers, interns, students. They don’t have degrees in economics, accounting, or business, or even a numerate discipline. They have never run a business. They have never worked in financial services. They have never met a FTSE100 director. They probably couldn’t even explain what a balance sheet is, what a futures contract is, how currency markets work. And yet, strangely, despite this complete lack of any credibility, they delight in telling us all exactly what is wrong, and exactly what needs to be done to fix it.

    So I will ask again: aside from cutting and pasting your article together from various sources, can you provide any supporting information about your background that would give more credibility to your views? It’s a perfectly reasonable question, and since you’ve chosen to put your work into the public domain with your name attached, you should be prepared to answer it.

  9. Ranjit Sidhu

    Thanks for the comments.

    LB- I will not reply to your comments as you seem to be obsessed on particular issues and cannot see I can add further in any way.

    Now, Sparky, firstly: Your previous comment on a immigration was to quote “Ranjit Sidhu. Ask yourself how much of an impartial observer he’s likely to be in the debate.” Hmm bit more than “I used your name to draw attention to the fact I was addressing you”.

    Now, secondly, (and this is what made me chuckle regarding your previous comment), I am a company director, with over a decade of experience of data/analysis provision to medium, small and major multi-nationals, government organisations and non-profits, in UK and aboard. Sorry.

    However, even if I was an intern, a student or whatever, it should not matter as the analysis and point of view in the article is what matters. So I see it as irrelevant.

    Anyway, thanks again for reading the article and have a great day.

  10. LB

    Of course you wont’ reply because you know you haven’t got an argument to make.

    Abu Quatada isn’t and wasn’t good for the UK. You won’t even debate that because it makes your argument that any migrant is good for the UK bogus.

    So lets move on.

    You won’t even answer a simple question as to how much tax a migrant needs to pay to break even. Why would that be? Ah yes, it shows that lots of migrants aren’t good for the UK. For example, any migrant on welfare clearly isn’t paying enough tax to be a benefit.

    At the other end, there are migrants who are good. Those who pay a lot of tax.

    So what are your tactics. In your case its that you won’t debate, because you know you would lose of the facts.

    I’ve the numbers. 5K a year for pensions for those earning pension rights plus 11.5K a year to cover the average spend.

    There aren’t many migrants paying 16.5K a year in tax. Some do, and we need those. Many don’t, and we don’t need those.

    If you want them, you could sponsor them. Pay out of your own pocket.

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