For 10 years, the risk of crisis has not been so high – what does this mean for the investor?

05.09.2019 09:17|Daniel Kostecki

More than 10 years have passed since the US recession ended. Over that period, investors and economists have often wondered when the next crisis will come, what it will look like and what may cause it. There were many false alerts. However, it appears only now that the probability of recession and economic crisis has increased to levels that need to be considered seriously.

In June 2009, the recession in the United States ended, which was earlier caused by the crisis in the real estate market along with the crisis in the financial sector resulting from trading in financial instruments based on mortgage loans in the US. Because it was a crisis affecting on the one hand the strongest consumers in the world, i.e. US citizens, and also affecting financial institutions whose activities in the current globalized world went beyond North America, it was necessary to reach for tools that have never been used before.

Central banks around the world have started asset purchase programs and have reduced interest rates to zero or even below zero. They were unprecedented and undertaken on a large scale. Financial institutions and governments have become their main beneficiaries. A lot of cheap money has appeared on the market to prevent a liquidity crisis in the financial sector. In addition, the central banks' asset purchase program caused government bonds to be more expensive because the central bank was constantly buying them. This, in turn, reduced debt yield and the cost of servicing it, which meant cheaper financing for governments. Cost of credit to households and enterprises was also declining, which was to stimulate economic growth and inflation and help recover from recession and crisis.

More than 10 years have passed since the end of the recession in the US, and during this time investors and economists have repeatedly wondered when the next crisis will come, what it will look like and what will cause it. There were plenty of false alarms at that time. In fact, once every six months or once a year there was a theme that would end the period of prosperity and bull market in the stock market. Is it the collapse of the eurozone with the collapse of the single currency, is it the economic slowdown in China or finally the tightening of monetary policy in the US. However, it is only now that the likelihood of recession and economic crisis has risen to levels that need to be taken seriously, which may also confirm investors and markets behavior.

Yield curve inversion, bond market rally resembling a speculative bubble, record negative interest rate on sovereign debt, huge market expectations for interest rate cuts and above all the escalation of the trade war between the US and China, from which it all began.

The American trade war with China is now seen as a major factor that could trigger a global recession and lead to a deep crisis, which investors are already afraid of. The number of fund managers predicting global recession has risen to its highest level in eight years, according to a August survey by Bank of America Merrill Lynch. Among approximately 224 investors with assets worth USD 553 billion, 34 percent said a global recession is likely over the next 12 months, which means the highest probability of recession since October 2011. The results of the August study also showed that 33 percent fund managers have taken protection against a potential sharp decline in equity markets over the next three months from August.

The stock market is in the most interesting, because looking at such a significant probability of recession in the United States, but also in Germany or a sharp slowdown in the eurozone, the main global stock indices are at very high levels. Once before, such a phenomenon was unthinkable that with the rally in the bond market and the gold market, as well as with the strengthening of the yen and franc, stock indices were so high. Perhaps this is due to the fact that companies and consumers have not yet begun to feel the effects of the trade war. Corporate results have not started to decline strongly, and consumer confidence is still at very high levels.

It seems that it is only when the trade war hits consumers directly that it also hits companies' profits more strongly, probably leading to a fall in share prices. With such a scale and rate of escalation of the trade conflict, this could happen even in the fourth quarter of this year. It is worth being prepared for this now knowing that in Conotoxia you can also trade not only for potential inclines but for the declines of global stock indices such as S&P 500, Dow Jones or Dax as well.

Do you know that:

  • The US yield curve inverts (the interest rate on 2-year bonds is higher than 10-year bonds). In the last 50 years, this phenomenon has predicted a recession five times on average 18 months in advance.
  • All German bonds have negative yields. In August, the German government sold 30-year bonds with an interest rate of minus 0.11 percent for the first time in history.
  • The price of 100-year Austrian bonds from the beginning of 2019 to the second half of August increased by 80 percent, bearing the features of a speculative bubble.
  • The interest rate market expects the Fed to cut interest rates three times at 25 basis points by the end of the first quarter of 2020.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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