Would there be a sequel to the 2008 Financial Crisis in 2016?

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By Kenny Simon

Several warnings about the possibility of a market crash in 2016 have certainly been part of the major news headlines nowadays. How would early signs look like or sound like, you may ask? Well for a start, since the sound is said to travel faster than the speed of light, we seemed to be hearing what looked like ‘sound investment advice’ instead of positive trade ideas on new growing opportunities or investments, but why?

What is the evidence?

Well, firstly let’s look at evidence of it through the adjectives, used in news articles. That may have pierced our eardrums repetitively like a broken record, leaving investors feeling either a little disheartened, surprised whilst confused or even disappointingly curious with lines like; “Global stock markets are off to a volatile start..” , “Another slump in Chinese markets…”; “U.S. markets lost more than 20 percent of their value in a single day..”; “xxx down more than xxx % in its worst start since xxxx…”; “ stocks sink amidst global sell-off, Oil plunges….” And much more of a similar tone as early as you blink an eye the next time.

One big theme that may have formed the backbone of what’s going on now is said to be a possible ‘Bond Bubble’ is about to burst. Bloomberg, CNN or CNBC as well as other financial media, focuses on such a topics as China’s slowdown, soaring stocks & plunging Oil prices, for the only reason that the asset class is more volatile, making them more marketable or sellable.

New bond bubble?

However, we need to know that the bonds are a foundation of the financial system and the bonds are forming the focus point for Central Banks. To put it simply, the world is drowned in too much debt. The bond bubble was close to $20 trillion in size before 2008 and now it’s staggering many more trillions and still growing. Central Banks have the free choice and power to either let the defaults hit and just wipe out the bad debt from the financial system or attempt to inflate the debts away.

Is Global growth real?

Just as a reminder, Bonds are simply IOU’s or in other words, a Loan. Problem is, the world today is simply drowned in too much ‘Debt’.

The truth is that ‘Global growth’ as marketed, with no real substance or genuine data today is not ‘real’ and is no longer able to service the global debt.

Creditors, whilst clenching their teeth, are almost certain to take losses. Translated, this means even if they were named major banks, as long as they have lent the most money with the least amount of reserves, high chances are, they will go bust.

Talking about the Banks, just the start of the New Year has brought a sudden shock, when Switzerland announced its plans to hold a referendum on a radical proposal that would shred commercial banks of their ability to print money which will deprive them a great deal of making money. The world’s banks, therefore, with their money-creation privileges stripped, would also be threatening their long-established role as the middleman through which all capital flows. As we’re at the start of 2016, it is now even harder to think of how secure Banks really are or even whether or not we really need the banks?

The currency markets, on the other hand, do impact most of the markets, but the main impact would be on commodity prices. Bonds, as we have mentioned above, are affected by commodities and, subsequently, stocks. The U.S. dollar and commodity prices are usually negatively correlated. As the dollar depreciates relative to the other currencies, the reaction could be reflected by commodity prices (which are based in U.S. dollars).

Is it a global recession yet?

So the question is, are we already into another global recession and whether the signs of the next market crash are getting clearer? The answer to that is; there are certain patterns in economic data showing signs of weakness. In addition to that, troubles persisting in Europe or the bubble bursting in China may have created or multiplied the ripple effect causing more mishaps, and in the world of economic and finance whilst further impacted by geopolitical happenings.

Central banks today, have much leg room in enacting loose monetary policies in order to prevent a recession from happening, compared to the crisis in 2008 when Central Banks were able to lower rates whilst expanding their balance sheets. Recession’s maybe a norm within the macroeconomic cycle which happens from time to time and the last recession was seven years ago, probably the next one is right around the corner.

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