Is there another financial crisis on the horizon?

I feel as if I have to write this, because in the last few months, I have been picking up on a lot of sentiment about a pending financial crisis. I am no soothsayer, but remember the financial world works almost entirely on forecasts, and history does have a habit of repeating itself. Nor am I suggesting that everyone should draw all their hard earned cash out of the bank, shares or their Kiwisaver accounts (most of us can’t do that anyway) and put it under the mattress, but forearmed is, as they say, forewarned.

Let us start with this article from?The Telegraph, London, reprinted by Stuff: quote:

With the 10-year anniversary of the Lehman Brothers collapse this month offering a ghostly reminder of past excess, some believe that the surge of covenant-lite loans in the leveraged loan market could be another ticking time bomb.

“It’s as if the financial crisis never happened and the lessons from it are ancient history,” says Jonathan Rochford, portfolio manager at credit manager Narrow Road Capital.

Amid fervent demand from lenders, these below investment grade loans have been stripped of their basic investor protections, like covenants, in recent years. Investors have piled into these risky but lucrative high-yield loans to obtain higher returns. end quote.

In other words, the situation that brought about Freddie Mac and Fannie Mae, the collapse of Lehmanns and various other financial institutions, is being replicated right now. High-risk loans are being sold to investors as part of a package investment. Buyers of tranches in collateralised loan obligations (CLOs) are making investment decisions off data that is dubious. Credit and financial managers are calling a new housing bubble that may be emerging in the leveraged loan market, which fuels private equity buyouts and bankrolls companies with poor credit ratings. We have seen all this before. quote:

Rochford explains that companies are “emboldened to seek ever weaker covenants and are taking advantage of the current conditions to borrow more at lower margins”. end quote

Now is the time to be extremely grateful that our mostly Australian owned banks are, and always have been, very conservative in their lending. It may be?seen?as harsh that first-time buyers are forced into saving a large deposit before buying a house, but it is prudent moves like this that will save us from a catastrophic banking collapse if things go pear-shaped. Just like they saved us last time.

In a different article from?The Independent, there are other things at play that could contribute to a severe global economic meltdown. quote:

There are some fairly obvious, and some not-so-obvious red lights flashing away on the economic dashboard for Britain, for Europe and for the wider world.

China crisis

The sheer size of the Chinese economy, second biggest in the world, means that it matters, not least because it is the leading buyer for the vast quantity of United States Treasury securities. Second, the Chinese economy, for all its brashness and export success, is not some sort of free-market paradigm but a deeply flawed, semi state-controlled opaque system where bad debts and failing enterprises are camouflaged by the authorities in Beijing, who value prestige more than productivity. end quote.

Well, okay. But there is nothing new here. Those prestige valuing authorities in Beijing tend to step in wherever necessary, and I don’t see why they can’t keep doing that. quote:

Protectionism

The ugly truth about Donald Trump?s promise to make America great again via protectionism is that, in the short term, he is right. Banging tariffs and non-tariff barriers on imports will indeed make companies build and invest and create jobs in the US. Americans as consumers will have to pay more for their cars and other goods they?ve been accustomed to freighting in from low cost bases in Mexico or Thailand, say, but as workers some regions will benefit.

The ratcheting up of tit-for-tat trade barriers worldwide, which began in the last crash, will simply choke off world economic growth, stifle improvements in productivity and lead to fewer jobs all round by the end of the sorry process. end quote.

Hmmm… This is a possible game-changer, although the USA is entering into trade deals in some places. This was the main reason why we needed a revised TPP, without the US. But there is no doubt that protectionism could be damaging to global trade. Thing is, I can’t see why the US won’t be the worst affected in the end though. Quote.

The Living Wage

Ever increasing minimum wage levels sound nice, but eventually they will take their toll on business and employment. This is via two main channels. First, eventually legislation will set wages at so high a level that some sectors of the economy simply become unviable ? hotels, restaurants, car workers and many others. Eventually jobs and business will be lost. end quote.

Haven’t we been saying this? The end result will be mass automation, but in the short term, businesses will go to the wall. Wages just cannot keep increasing. Eventually, customers will find things too expensive and will stop buying.

The article lists a few other things that can be seen as risks, but I think you get the picture. Right. So now we need to look at how this is likely to affect us down here in Godzone.

I don’t think we are at risk of a banking collapse, although there have been questions about corrupt banking practices in Australia recently.

Trade affects us hugely, but our trade boffins have been very smart to sign up to a new TPP and then to go off hunting the globe for new trade deals.

A possible housing crash… well, prices have been exceptional, but we still have a shortage of housing.

Rising wages… yes. We are very vulnerable here, and we have a government that has committed to labour reforms that will take us back decades.

I could write about this stuff all day, but at the risk of boring you all to death, let us wrap up with one little question.

How confident are you that this government will handle our economy well in any coming global economic crisis?

Because, if the answer is what I think it is… then that is why we are facing falling business confidence. It is nothing to do with business hating Labour governments.

 

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