Another Market/ Financial Crisis?

Mark Mobius says, “There is no question we’ll see a financial crisis sooner later …”  In one sense, he is right!

Why?  Because classical tradition suggests business cycles occur in 3 shapes:

       i.          3 – 4 year cycle (Kitchin cycle) – for inventory investment;

      ii.          7 – 10 year cycle (Juglar cycle) – in equipment investment;

     iii.          20 year cycle (Kuznetz) – building investment.

Then there is the long-wave, the Kondratieff cycle of about 50 years.  But not every country will have the cyclical structure in the same frequency range.

In the last three decades, the world economy has become increasingly integrated.  So one economy’s problems could get translated into issues in another linked, open economy.

But the U.S. is leading a process of de-linking economies.  The Trump administration has actively taken a wrecking ball initiative to global cooperation (his favourite singer is Miley Cyrus – you guessed it!)  So G7, NAFTA, TPPA are either dying or dead!  Then there is populism of the far right or far left variant which leaves little room for cooperation.  Central banks are also tired of quantitative easing and may not agree for another new round, if a crisis emerges.  Then there is the record level of indebtedness in the global economy (total debt is now USD 237 trillion).  We are in a fragile place and it only takes a “black swan” event to send us hurtling into disaster!

So much for morbid news!  Let’s try to be positive – the banks are stronger today then before, policy makers have a better crisis toolkit, and pragmatism may still rule the day.  So let us be wise in our risk management, cautious in new investments and strong on our cashflows.