Life after the GFC

[pj2105]

Just wanted to know what people thought would be the next 'correction' to take place after the GFC (Global Financial Crisis).
I think we have seen the worst of the GFC and while we might not be leaping away from it in leaps and bounds, slowly we seemed to be getting past it.

Lets assume I am right (we could argue I am wrong, but let us say I am right for this argument).

What is the next thing to look for that might cause market jitters?

-Will the housing market bubble or will it deflate orderly?
-Are there more spooky numbers to come out of the market that has not been accounted for?
-Will the USA economy drag back the rest of the world markets?
-Is there something brewing in Europe that may hit us hard?

thanks

 

[white_goodman]

Re: Life after the GFC.

Commercial property crash would be one that comes to mind.

Yields are already softening significantly in world markets... the problem I see is the amoutn of debt some of these REITS and whoelsale trusts carry. The loan covenants say a certain debt to equity ratio, but if valuations keep worsening due to no significant buyers in the market(therefore yields getting larger) then valuations will have to come down, breaching loan covenants, forcing a fire sale on many commercial assets and eventually much of the debt cannot be paid back through these firesales, then there becomes another run on the banks as they too are overly leveraged against commercial property...

anyway thats just the doomsday scenario I thought of in a lecture yesterday.

 

[Krusty the Klown]

Just wanted to know what people thought would be the next 'correction' to take place after the GFC (Global Financial Crisis).
I think we have seen the worst of the GFC and while we might not be leaping away from it in leaps and bounds, slowly we seemed to be getting past it.

If we use history as a reference, it will happen again in at least 20 years.

The causes always seem to be the same, the masses just forget and say "yeah but that could never happen again".....

It seems we have a 1987 size event every 20 years or so or every generation. Usually asset price bubbles.

The ten years leading up to 1929 were similar to the 10 years up to the GFC - cheap and easy credit driving a demand for assets fueling unrealistic price growth.

The next one should be the same thing all over again.

 

[bongcso]

What is the next thing to look for that might cause market jitters?

Maybe a crash in the Chinese stock market. The chart for the Shanghai composite index is not looking good as it has broken the 8 month uptrendline.

Many people are looking for a China led recovery so if their recovery stalls or breaks, it would probably cause jitters to other markets as well.

Christina
SMSF Investment Strategies blog

 

[Temjin]

-Will the housing market bubble or will it deflate orderly?

You mean crash or deflate orderly? That largely depends on the will power of the government to "keep" the bubble going. Seeing there is a HUGE APTITUDE for Australian issued public debt from the Chinese or other emerging countries, you can bet KRudd and his government would continue to build up deficit to "stimulate" the market and prolong the deflation as much as possible.

So yes, eventually house prices will revert back to its historic means, whether by massive crash or be "inflated" out over a long period of time.

-Are there more spooky numbers to come out of the market that has not been accounted for?

There are a lot more spooky numbers that the general public are not aware of, especially with the banking system in the US. Karl Denninger from The Market Ticker has been doing a great job in pointing these out, and as well as the massive amount of fraud going on with the US economy/banking system.

He points out a lot of stuff that seem so obvious from a mathematic sense, but has not been picked up by the mainstream news. For example, how the regulators (FDIC) suggested that if lenders have more than 5% of their loan book impaired, it would be considered as a level that could wipe out a bank's equity and threaten its survival. Not so surprise, bloomberg (FINALLY!) have recognised the problem and computed that those banks with nonperformers loan above 5% has a combined deposit of $193 billion, and that's 15 times the size of FDIC's deposit insurance fund.

Not only that, the total nonperformer loans of all banks in the US is like 6.5%+. This effectively means the US banking system is technically INSOLVENT, but have only survived to date largely thanks to the new accounting rules to hide the true values of their loan assets. Of course, not all banks would have such level of nonperforming loans, but I'm talking about on average here.

Most people totally underestimate the serious of their banking system here. It is like living on the edge of a line hanging across two really deep cliff. If all those "rescue" policies were removed and bring everything (including the way how loan assets are valued) back to PRE-BUST era, you can guarantee that most banks in the US would have become instantly bankrupted.

-Will the USA economy drag back the rest of the world markets?

Before the GFC, you had tons of economists saying the world has decoupled from the US economy and that even a severe recession in the US would not adversely affect the rest of the world. (especially BRIC countries)

Of course, we all know this myth has been debunked.

The same goes for today, I still highly doubt the world has restructured itself enough to still be totally decoupled from the SECULAR downturn of the US economy.

The recent boost in China's economy has rise a lot of questions about the true effectiveness of their stimulus package. Their industrial capacity and output has significantly declined since last year (like 25%), however, their money supply and lending growth has grown by at least TRIPLE in merely the last few months. Of course, this naturally built in to their GDP statistic.

So I don't think the Chinese would save the world from going deeper into the hole at least in the short term.

And the secular downturn of the US economy will definitely drag along with everyone else.

-Is there something brewing in Europe that may hit us hard?

thanks

Their banking system is actually in a worser situation than what I have explained for the US. So yes, both consuming orientated economics would put a huge pressure on the existing capacity of the exporting countries (i.e. China, Japan, etc), and that would certainly drag us down as the demand for resources would not return to 2005/2006 level for a while.

However, I agree that Australia IS A LUCKY country because we have a lot of the resources that emerging countries need. I'm permissitic about the US economy but to a degree, more optimistic about Australia. However, the ride would be extremely rough and we still have tons of private debt to deleverage.

 

[Mr J]

I have no idea, I just think that the problems that lead to the GFC have not yet been sorted, and that perhaps the pain has just been pushed aside for another day. One of my philosophies that balance is required, and forces will act to try and achieve that balance. I do not think the recent rally has left financial markets balanced.

I also think there is a large portion of the western economy that is unproductive (particularly the excess of services), although I don't know how greatly that harms the western economies.

It seems we have a 1987 size event every 20 years or so or every generation. Usually asset price bubbles.

'87 sized events occur more regularly than that, just not so quickly.

 

[tommymac]

If we use history as a reference, it will happen again in at least 20 years.

The ten years leading up to 1929 were similar to the 10 years up to the GFC - cheap and easy credit driving a demand for assets fueling unrealistic price growth.

The next one should be the same thing all over again.

I agree with this. IMHO the Governments have helped too many people and businesses with handouts and bailouts.

The same thing could easily happen again.

 

[Krusty the Klown]

'87 sized events occur more regularly than that, just not so quickly.

Mr J, do you mean a bear market as opposed to a dramatic crash?

A warning sign to another severe correction could be a lack of or wind back in regulation in a market (in this case the US), another common factor between 1929 and 2008.

 

[jono1887]

Do people really think that the effects of the GFC are really over? Or will it get worse with governments being involved... I don't think most governments are ready to deal with any sort of further downturn for the next decade while they struggle to reduce their debts.

 

[Krusty the Klown]

I think most people know we are not out of the woods yet, but the perception is that most of the actual or possible damage has been done.

What's left now is the hard part - to recover.

 

[Mr J]

Mr J, do you mean a bear market as opposed to a dramatic crash?

Either. Attached a graph to show how smooth (too smooth) the run was from the 80's to '02, in comparison to the rest of the century.

 

[Krusty the Klown]

Yes, I've noticed that trend from the 80's onwards also.

It coincides with the use of computing power in the workplace.

In the 1960's computers were first used to calculate risk in business and markets, but you needed one the size of a building to to it.

Come the 1980's, computers were smaller, cheaper and becoming common in most businesses until now where most businesses can't function without one.

Maybe computers allowed an expansion in markets that was unsustainable for the short time period.

I don't know if this is a factor, just an observation.

 

[white_goodman]

of course it looks smooth up the top its on log scale... It lost 50% roughly recently, barely even shows up

 

[Mr J]

Look at the numbers then. A lot more bear markets than in the last 30 years.

 

[Buckeroo]

There isn't!

Scenario:

The Chinese want our resources cheap because it can't sell their products to the west - we will be in the doldrums for years. So they are hoping their domestic economy takes off, but won't unless they can buy our commodities at a lower value.

So, the Chinese will wait for the opportune time to sell out of their American investments and practically destroy the US in one foul swoop.

The US will be in no shape to protect us & the Chinese then waltz in and take control of Australia.

Easy

Cheers

 

[Mr J]

There isn't!
The US will be in no shape to protect us & the Chinese then waltz in and take control of Australia.

Easy

If China was able to waltz in and take Australia, I don't think any of this really matters. In this situation I'd be stocking up, hit the hills and wait for the nukes to fly.

 

[pj2105]

If China was able to waltz in and take Australia, I don't think any of this really matters. In this situation I'd be stocking up, hit the hills and wait for the nukes to fly.

Move to New Zealand and when they get set to take that over, move to Antarctica. They when they get set to take that over...next stop the moon!