As stocks decline: is this the start of a new financial crisis?
Duncan Richardson, News Editor
21 Aug 2015, 10:25 a.m.
In 2008 central banks stepped in as lenders of last resort to halt the meltdown of the financial system. Toxic debt based securities were transferred from the private sector to the public sector via the printing trillions of dollars. It appears these actions only delayed the day of reckoning.
As global stock markets experience sharp declines time is running out. Central Banks are out of ammunition and losing control at a time the world economy is grinding to a halt. Are stock markets beginning to crumble under the weight of record valuations and unrealistic expectations? There are signs the situation is set to deteriorate further.
1 – China
China helped save the world economy in 2008 by launching a massive stimulus programme which sparked an infrastructure boom and demand for raw commodities. The Chinese economy is now stalling and GDP is slowing. Their stock market is under pressure, exports have fallen and house prices are in freefall.
2 – Commodity collapse
The Chinese slowdown has caused commodity prices to collapse. The Bloomberg Global Commodity Index, which tracks 22 of the most commonly used commodities, is now at levels not seen since the start of the century.
Commodity based economies such as Brazil are in turmoil. Lower demand has resulted in a significant weakening of their currency and inflation is now over 9%. Economic weakness will no doubt result in political upheaval.
3 – Resource sector debt crisis
Billions of dollars have been loaned to the resource sector to fund exploration in mines and wells. At current prices a profit will never be made and defaults will no doubt ripple through the economy.
4 – Credit market pressure
As central banks run out of ammunition the credit markets are trying to reprice risk. The libor rate, a guide to how concerned banks are about lending to one another has been on the rise for the last 12 months. After six years of central bank stimulus the credit markets are now unable to cope.
5 – FTSE 100 third longest bull market
The FTSE 100 has been in a bull market since March 2009, the third longest in history. On only two other occasions has the stock market risen for longer. Are we now seeing the bubble starting to burst?