We are at the 10-year anniversary of the 2008 global financial crisis (GFC). The global financial system cracked due to excessive risk-taking, a culture of borrowing to invest, and a systemic lack of regulation. Families struggled, businesses failed, and the global economy was shaken to the core. Is the next crisis just around the corner — and what can Exness traders do? We asked two financial professionals to state their case.
YES! The next financial crisis is coming!
A decade ago, Wall Street imploded. To simplify what happened, banks loaned out more than they should, more than they could. The bubble of debt grew until it was no longer sustainable.
The big banks are constantly assuring us that there are stops and checks in place so it will never happen again, but the facts say otherwise. Simply put, banks are giving out loans like there's no tomorrow.
Everything starts with USD
If you look back at all the major global upheavals, the cause always falls to the American economy and US banking groups. Once again, a storm is brewing in Trumpland. American students are borrowing at record highs, already reaching over USD 1.5 trillion. This is twice the level of when the last financial crisis was instigated. Add to that, home loans are bizarrely on the rise despite the recent drop in house values. It seems the mainstream banks have opened the doors to risky lending once again. To make matters worse, there is a fast-growing trend for leveraged loans. Banks are facilitating loans to companies, who then sell off portions of the equity to smaller investors. This has opened the door to trillions of dollars in loans that are now outstanding. It is estimated that a staggering 80% of current leveraged loans are not sufficiently secured and at high risk of default.
Like last time, corporate bonds are rising beyond all forecasted levels. As reported by the S&P and other financial establishments, USD 1.6 trillion of the debt is currently outstanding, making it the largest corporate bond market of all time. The Fitch Ratings warns that a downgrading of these bonds is imminent and more than USD 500 billion is at risk.
Strategies to survive the crisis
The global economy is dangling off the edge of a cliff by its fingertips. Germany, Italy, and Greece are already tightening their belts, and when other main players begin to fall, the domino effect will take hold and the next recession will begin, and there’s nothing that can stop it. So what to do? Aside from selling your house and buying a farm with solar panels and a freshwater well, many traders are turning to metals. Gold was the go-to hedging solution during the last financial crisis, and may well become a safe haven investment once again. Bitcoin is in great debate, as many crypto-analysts expect bitcoin to rise when the traditional currencies begin to fall.
NO! The next global financial crisis is neither global nor a crisis
Are we standing at the precipice of the next great bust? It’s certainly attention-grabbing to prophesise that the next crisis is due. Is it time to diversify your portfolio, invest in the Swiss franc and ensure you have a fixed-rate mortgage. The truth is more mundane.
The world is due for a dip: some analysts are predicting a crash as soon as 2020. But the conditions of 2008 are not the environment of now. And lessons have been learnt.
2020 is not 2008
In the US, the subprime mortgage crisis was a principal reason for the housing crash. In 2006, American subprime loans came to USD 600 billion and made up over 20% of the mortgage market. By 2015, they constituted only 5% and amounted to just over USD 55 billion. There are also tighter lending standards, a decline in “buy-to-flip” purchases and a trend of younger Americans being priced out of the urban housing market. Real estate prices will contract, but it will not be the chaotic tumble of 10 years ago.
Secure global frameworks
The world’s banking system is in a better place than a decade ago. The Basel III framework was created specifically to “address the shortcomings of the pre-crisis regulatory framework”. Globally, banks have more liquidity and more available cash now than they did a decade ago. This mitigates the fears of the kind of bank run that almost led to a collapse of the UK banking system.
Global stock exchanges are also in a period of consolidation, which could lead to future growth. The Dow Jones, a price-weighted index of 30 important publicly traded companies, is only 20% away from a Dow Jones 30,000. If this came to pass, it would indicate that fears of a slowdown in global trade are overblown.
The USD is the global anchor — and the USD is strong
Most critically, the American dollar continues to hold the global economic system together. Despite the differences between the Federal Reserve and the Trump administration, the US will act to combat any crisis. It did so in 2008, in contrast to the uncoordinated self-interested European responses. And the US will act as a bulwark against possible collapses in emerging markets like Turkey and Argentina.
Forget gold or the franc. For investors, a strong USD makes it the new safe haven currency. Interest rate hikes, deregulation, trade wars, tax cuts and increased spending have all resulted in a strong, bullish US dollar. While the US dollar remains strong, the problems on the periphery will remain just that: peripheral.
So there you have it. Two very opposing views on the state of the global economy. During the last crisis, many traders set trading orders that would profit from the collapse and benefited from the "correction." Whatever happens in the coming year, Exness traders will have access to opportunities thanks to the "buy" and "Sell" options available.
This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation. This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the Analytics. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles.