The Take

Global Financial Déjà vu21/09/18

New QUTEFS executive for next year Adir Salem takes on the financial markets in this week’s edition of The Take:

Ten years ago, the world entered at least in an economic sense the darkest point in history, the Global Financial Crisis. In comparison this singular event was more devastating then any of its predecessors. In consideration the net total damages that plagued not only the United States financial markets, but subsequently the world, was worse than the sum of the prior economic disasters that had occurred within the century.

Today, I will explore whether the economic mind-set of governments, the risk tolerance of financial institutes and market makers have changed at all, and examine if we are ready for the next inevitable financial crisis when it may arise.

Ten years ago, Fannie Mae and Lehman Brothers, two financial institutions dubbed “too big to fail” were trading heavily in the derivative market of mortgage-backed securities of the United States housing market. The companies’ exposure to these derivatives exceeded their total market value, whilst the underlying assets of these securities were dropping in quality ratings by the minute. Then what could only be described as one of the worst liquidity crises in history occurred. The major banks in the United States could no longer fund or circulate finances in the economy and the rest of the major banks couldn’t afford to bail out Fannie Mae or the Lehmann Brothers.

In these dark times, we saw the limitations of the Federal Reserve, and what it truly takes to push an entire financial market to collapsing.  Ben Bernanke, former Chair of the Federal Reserve reflected recently on the actions that were taken during the collapse of the banking sector within the United States.

“In hindsight, the government’s response, was slow, but proved to be successful even though it was unpopular”. Those methods were the effects of bailing out the major banks as to minimize the damage that the consumers experienced. Additionally, the bailouts provided a liquidity supply that was so desperately needed with the use of the controversial quantitative easing method.

This topic comes up again because JP Morgan Chase one of the world’s most influential banks, has stated to the financial world to pencil in 2020 as the year that a liquidity crisis will occur again.  A model produced by the analyst team at JP Morgan Chase predicts a 20% slump in US shares.

“Across assets, these projections look tame relative to what the GFC delivered and probably unalarming relative to the recession/crisis averages of the past”, JP Morgan strategists John Normand and Federico Manicardi wrote, noting that during the recession and ensuing global financial crisis the S&P 500 fell 54 percent from its peak. “We would nudge them all at least to their historical norms due to the wildcard from structurally less-liquid markets.”

JP Morgan’s analysis and expectations of the stock movements in the case of a recession

At the very least, the last Global Financial Crisis taught the world how to react. Whilst analysts predict future market conditions to be somewhat uncertain, prior policy has taught us clearer management of financial crises. The restructuring of the financial markets and the stricter lending practices both protect the market from crisis. It is important that risk experts do not forget the lessons learned a decade ago. I think that today, even with declining wage growth, record low interest rates and overheated markets, the economy is in a better position today than 10 years ago.

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