Another day, another prediction of coming stock market meltdown
With markets hitting record highs it seems as it is almost routine, if not trendy, to come out with predictions of imminent stock market chaos.
The latest round of doom and gloom comes from Arturo Bris, a professor of finance at European business school IMD. A former Yale school of management prof, Bris suggested "not enough action is being taken to avoid it a crisis" he predicts will arrive by April 2015.
Some of the "statistics-based" reasons Bris cites as proof of imminent financial disaster:
1. A stock market bubble
Stock markets have performed "unrealistically well" this year. At some point the situation "will explode." Analysts have been disappointed with earnings in 2014. The money taken in by companies has not been in line with market expectations. If markets were to revert to a "reasonable level with regards to earnings, there will be a stock market drop of between 30-35%."
2. A Chinese Banking Crisis
The Chinese shadow banking sector consists of loans to government institutions whose performance is not well monitored and not open to competition. If this system collapses, the global economy will be negatively affected.
3. Geopolitical Energy crisis
If the US begins exporting natural gas to the rest of the world, Russia might feel threatened. This could cause a geopolitical storm. Exports would allow the US to have control over energy prices and exert influence over countries like the UK, India and Japan.
4. Another real estate bubble in countries like Brazil, China, Canada and Germany.
Prices are going up because availability of credit is huge and buyers are pushing prices up without realizing that they do not correspond to fundamental values.
5. Ratings and bankruptcy: 'BBB as the new AA'
Companies have taken on too much debt. The new norm is to have a BBB rating. In the U.S. there are only three companies left with an AAA rating: ExxonMobil, Microsoft and Johnson & Johnson. If ratings are an indicator of bankruptcy, "there will be bankruptcies across the board." If interest rates increased by 2%, "half of the corporate sector would be wiped out," says Arturo.
6. Cash and hyperinflation
Central banks and corporations are holding too much cash, and could end up damaging the economy as a result. The ECB is lending money to financial institutions. These institutions put the money back into the ECB. A vicious circle has formed. Today, according to Bris, "Google could afford to buy a majority stake in Ireland and Microsoft could buy more than 50% of Singapore, which is immoral."
"While many economies seem to be finally rebounding since the 2008 crisis, we shouldn't be complacent. Too often we do not learn from history and do not act when faced with a crisis we know is imminent," Bris is quoted as saying.
The latest round of doom and gloom comes from Arturo Bris, a professor of finance at European business school IMD. A former Yale school of management prof, Bris suggested "not enough action is being taken to avoid it a crisis" he predicts will arrive by April 2015.
Some of the "statistics-based" reasons Bris cites as proof of imminent financial disaster:
1. A stock market bubble
Stock markets have performed "unrealistically well" this year. At some point the situation "will explode." Analysts have been disappointed with earnings in 2014. The money taken in by companies has not been in line with market expectations. If markets were to revert to a "reasonable level with regards to earnings, there will be a stock market drop of between 30-35%."
2. A Chinese Banking Crisis
The Chinese shadow banking sector consists of loans to government institutions whose performance is not well monitored and not open to competition. If this system collapses, the global economy will be negatively affected.
3. Geopolitical Energy crisis
If the US begins exporting natural gas to the rest of the world, Russia might feel threatened. This could cause a geopolitical storm. Exports would allow the US to have control over energy prices and exert influence over countries like the UK, India and Japan.
4. Another real estate bubble in countries like Brazil, China, Canada and Germany.
Prices are going up because availability of credit is huge and buyers are pushing prices up without realizing that they do not correspond to fundamental values.
5. Ratings and bankruptcy: 'BBB as the new AA'
Companies have taken on too much debt. The new norm is to have a BBB rating. In the U.S. there are only three companies left with an AAA rating: ExxonMobil, Microsoft and Johnson & Johnson. If ratings are an indicator of bankruptcy, "there will be bankruptcies across the board." If interest rates increased by 2%, "half of the corporate sector would be wiped out," says Arturo.
6. Cash and hyperinflation
Central banks and corporations are holding too much cash, and could end up damaging the economy as a result. The ECB is lending money to financial institutions. These institutions put the money back into the ECB. A vicious circle has formed. Today, according to Bris, "Google could afford to buy a majority stake in Ireland and Microsoft could buy more than 50% of Singapore, which is immoral."
"While many economies seem to be finally rebounding since the 2008 crisis, we shouldn't be complacent. Too often we do not learn from history and do not act when faced with a crisis we know is imminent," Bris is quoted as saying.
