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Archive for the 'Financial Crisis' Category

Avoiding the Bank Crisis of 2015

London-based consulting firm Oliver Wyman recently launched their 14th annual State of the Financial Services Industry report, titled “The Financial Crisis of 2015: An Avoidable History” in Davos, Switzerland during the 2011 Annual Meeting of the World Economic Forum. Bloomberg has an article about it here.

The report imagines a scenario in which another world banking crisis ensues as a result of the popping of a commodity-fueled bubble. Most interesting about the report is the general suggestions for regulators and for financial institutions who want to uncover and remedy the weaknesses in the financial system. For example, the report suggests to regulators they need to spend as much time preparing for crisis scenarios as they do modeling the probability of them happening. I recommend reading the report in full.

The Five Greatest Threats to Financial Markets in the Next Decade

After a bit of reflection and quiet contemplation yesterday on the what might be the greatest threat to financial markets in the coming decade, I came up with a list of about five potential threats. I did my best to synthesize everything that I have read or listened to in the past year. I also tried to imagine the unimaginable and to envision scenarios that are counter to current conventional thoughts regarding the future.

So here are the threats, in no particular order.

Failure to Institute Appropriate Reforms

A year after the failure of several major institutions and Congress has not implemented any meaningful type of reform. Capital requirements have not been increased. Instead of breaking up the too-big-to-fail institutions, the government is allowing—in effect, encouraging— them to grow. Credit default swaps still do not have a central clearinghouse and are still treated as securities rather than insurance. The shadow banking system remains unregulated. The government is continuing to prop up housing prices via tax credits and is continuing to give home loans to risky people for only a measly 5% down payment.

Based upon the prior examples alone, any future crisis has the potential to be much worse because of the failure to institute adequate and necessary reforms.

A Major Country Defaulting on its Debt

I’m not talking about Argentina or Turkey. I’m talking about a country like Japan (see this article), the United Kingdom, or the United States. Now, a credit downgrade might be more likely, but I think its well within the realm of possibility that any one of these countries could default within the next decade unless their governments address their budget deficits and spending habits.

According to the OECD, Japan’s debt to GDP ratio will likely rise to 197% next year. I bet that the United States will have a debt to GDP ratio of 100% next year. The United Kingdom will have a debt to GDP ratio of about 72% next year, the greatest its ever been in thirty years.


Future inflation is the biggest thing about which everyone is worried, therefore this is probably the least likely to occur within this next decade. However with that said, inflation and the side-effect of rising interest rates has the potential to negatively affect a country’s debt situation. Increasing the costs for a country to service its already massive debts could very well induce a death-spiral that forces a country to default on its debt. Can you just imagine what it would be like for Japan or the United states if they were forced to pay double the rate for its long-term debt? I imagine it would not be very pleasant.

And as a reminder to those of us in the U.S., rates rose from the 50s to the 80s and rates declined from the 80s to 2010. Financial history is cyclical and there is nowhere to go but up for rates. Rates will eventually begin another 30-year journey upwards.

Conversely, since we are talking about just the next decade, a decade of world-wide deflation could probably be the most likely scenario simply because very few people consider it likely.

Global Catastrophe

Here are some catastrophic events that could serious consequences for global economies and markets:

  • a 9/11-type terrorist attack somewhere in the world
  • a global pandemic that kills millions of people
  • a nuclear war: Israel/Iran; India/Pakistan; any other imaginable/unimaginable combination of countries
  • a virus or bacteria or insect that destroys a large percentage of the world’s crops and food supply

As a sidenote, its not worthwhile to consider any scenario with a Mad Max-type result. When we’re in a wasteland fighting each other for fuel there is definitely not going to be any financial market to worry about.

“The Next Bubble”

“The Next Bubble,” whatever that might be, is probably another conventional threat to financial markets. Everyone knows they happen periodically and everyone knows that with all the money being printed by the government, this money has to go somewhere if people aren’t using it to pay down their debts.

Here are some potential future bubbles:

  • Oil/Natural Gas – Hard to imagine, but it could happen again.
  • Commodities – I’ve been reading how China has been stockpiling vast amounts of commodities to hedge against a depreciating U.S. dollar; perhaps this will be the next bubble?
  • Debt – After so many investors were burned by equities and complex securities, investors have turned to “safer” government and corporate debt for their investment needs. If investor psychology has shifted towards a general preference for debt, this preference will eventually shift at the peak of demand as it always does.
  • Real Estate – Another real estate bubble? I think its entirely possible. We’ll call it the Double Bubble. Prices are being propped up in the United States. Apparently there is a bubble in Canadian real estate (of all places). China is also a likely candidate.
  • China – China in general is a place where people worry about a bubble forming.
  • Alternative Energy – Solar, wind, geothermal, cold fusion (haha). Might become a bubble. I don’t know. But these alternative energy investments will surely suck if global demand for fossil fuels is near zero for the next decade.


In summary, I was able to envision five threats to the financial markets over the next decade: a major country defaulting on its debt, inflation (or an unexpected decade of deflation), global catastrophe, and “The Next Bubble.” I would be very interested to hear my readers’ thoughts and ideas on this subject. Its very hard to think about the future and possible black swan events, but definitely a worthwhile effort.

True Bull Market or Bear Market Rally?

This video from Warren Pollock explains in part why we may or may not be in a new bull market or just a bear market rally. He says that when we have a rising US dollar and a rising stock market, this is  a true bull market. However, when our currency is falling and the market is rising, this is a sign of a false bull market.

Also, if you have the time, I highly recommend watching Pollock’s full presentation entitled “The Great Reset”, the goal of which is to provide a political, economic, and social forecast in the context of the systemic failure that has already occurred in the US. Though I disagreed with some small parts of the presentation, it was nevertheless very thought-provoking.

Alleghany’s Thoughts on the Big Picture and Financial Crisis

Over the weekend I got around to reading some more annual reports. One that stood out was Alleghany Insurance. The reason Alleghany’s report stood out was because of its thoughts on the “big picture,” or rather, the reason for the financial crises of 2008. The general theme for most companies was to blame the availability of easy credit, the Fed, derivatives, and/or American consumers spending more than they were earning.

With this back drop, Alleghany’s thoughts were a real curve-ball. This is how they begin their “thoughts on the big picture” (as contained in their 2008 annual report):

The imbalances that are evident today in the global economy trace their origins to August of 1994, when China embarked upon a course of a managed, nominal currency peg of the renminbi (RMB) against the U.S. dollar. Few remember today that as recently as 1981, the RMB/USD exchange rate was as strong as 1.53 yuan per dollar; by 1994 it had weakened to as low as 8.76 yuan per dollar, and was pegged at 8.28 until 2005. Over the following decade and a half, this currency policy contributed to stagnant U.S. household incomes (real median U.S. household income is lower today than it was in 1998), as U.S. labor could not compete with a massive, artificially priced Chinese labor pool due to the currency devaluation. The mechanism with which China (and other countries with pegged currencies) kept its currency artificially depressed was to recycle dollars into U.S. treasury securities and agency securities, thereby keeping U.S. interest rates artificially low, exporting deflation, and importing inflation. The prime beneficiary of this policy in the United States and other OECD (Organization for Economic Cooperation and Development) countries was the financial services industry, which took advantage of excessively easy money and low interest rates to fund credit expansion to middle class households, who sought to improve their standard of living despite stagnant incomes by borrowing to fund consumption.

So rather than blaming something that was particular to America, Alleghany pinpoints China’s currency peg as a large reason for the worldwide financial crisis. Very interesting.

Commercial Real Estate is the Next Crisis?

Is commercial real estate likely to be the next crisis?

ORLANDO (Reuters) – U.S. commercial real estate problems could derail the country’s economic recovery later this year, a top Federal Reserve official said on Monday.

“Many banks are pretty heavily exposed to commercial real estate. It is also a big part of the securitization market. So commercial real estate is one that concerns me,” said Federal Reserve Bank of Atlanta President Dennis Lockhart.

Lockhart, a voting member of the Fed’s policy-setting committee this year, said that around $400 billion of commercial real estate refinancing was hanging over the market and he was monitoring its progress with care.

“If you think of 2007 and 2008, in a negative sense, as the year of…residential real estate issues, it is possible to think of 2009 as the year of commercial real estate. That is the one domestic factor that keeps me up at night,” he told the Association for Financial Professionals after a speech.

With the government incapable of instilling any confidence in the markets, it seems inevitable to me that nothing will be done about this seemingly impending disaster. For now, I remain short real estate via SRS.

Fix It!!!

Colbert Explains the Credit Crisis and Bailout Bill

Colbert gives a vivid explanation of the credit crisis.

Sins of “Deregulation” a Political Fairy Tale

The WSJ says that the ill effects of deregulation, a subject the Dems use to blame Republicans for the current financial crisis, is nothing but a political fairy tale:

As for the sins of “deregulation” more broadly, this is a political fairy tale. The least regulated of our financial institutions — hedge funds — have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren’t diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Even Bill Clinton says the repeal of Glass-Steagal has nothing to do with the current crisis. I am happy to continue blaming the Dems for blocking reforms and regulation of Fannie and Freddie, two institutions I think are much more causally related to our problems.