Bloomberg interviewed ten economists, banking specialists and other experts. They found out what things should be feared shortly in the economy. Among them — unstable oil prices, unsatisfactory situation in China and a possible Bitcoin bubble.
The collapse of quantum foundations
When you recollect the financial crisis, you will realize that the collapse of quantum funds (investment funds that use quantum analysis in their work, create predictive models to find out how attractive investment is) has become its harbinger. Quantum funds experienced great losses in August 2007. Exactly one year before the financial catastrophe.
The founder of a similar fund – AQR Capital Management – Clifford Asness says that the second collapse of quantum funds is inevitable. Quantum strategies are popular, and popularity is what drives them to move in one direction. Be it a path to success or failure. As a result, the second collapse of such funds will happen due to the negative influence of the media.
Bill McNabb took over the leadership of Vanguard Group Inc. just after the financial crisis and helped the company increase the value of its assets by $ 3 billion. Now he is going to leave his post and says that his primary concerns are related to cybersecurity: “Our budget for cybersecurity has grown ten times over the past seven years”, says McNabb.
Kyle Bass, the founder of the asset management company Hayman Capital Management LP, which monitors the situation in China, said that the country’s leadership hides the unsatisfactory state of the banking system — for political reasons.
Zhu Ning, deputy director of the National Institute for Financial Studies at Tsinghua University, raises the same question in her book China’s Guaranteed Bubble. According to him, the enormous amount of debt burdening the Chinese financial system, combined with an overheated real estate market, creates significant risks for the economy, from which the rest of the world is waiting for growth.
Stability of exchanges
If you divide the hours of the trading day by a quarter, then there is no such important segment as the last 15 minutes. It is at this point that the final prices are set, which affect the trading portfolios and pension accounts. And if stopping the work of one of the stock exchanges – due to an internal malfunction or a cyber attack – will not affect the market during the day, then any mistake in the last 15 minutes will lead to unpredictable consequences.
Formally, there is a “plan B”, according to which one of the exchanges will be a backup for another in this situation. But the fact is that in such cases this plan has not been tested – and this leaves a lot of questions unanswered.
According to Joanna Fields, CEO of the consulting firm Aplomb Strategies Inc, the lack of the ability to set the final price of shares may affect other types of securities, including options and OTC derivatives. “There may be a chain reaction”, says Fields.
Real estate market
Diversification is not always safe, says Jared Dillian, who previously ran the stock investment fund. “Retail investors who buy exchange investment funds or index funds think their assets are diversified”, Dillian said. But, as he said, not everyone understands, that these in these trades are involved by a lot of people. We can turn around ten years ago and see how things can go wrong.
This practice does not lead to a financial crisis. But Dillian believes that this could lead to the sale of assets – a year, five or even ten years. “This situation has the potential to reach the scale of a major market collapse”, Dillian said.
Discussions on whether Bitcoin is a bubble or not continue to divide the financial world. On the one hand, billionaire Mike Novogratz spoke of the intention to earn “a bunch of money” in the Bitcoin boom. JPMorgan Chase CEO James Dimon, on the other hand, calls people who buy cryptocurrency “stupid.”
But the consequences of the likely collapse of the cryptocurrency will be limited. Due to their relatively small popularity. However, this may change. The entire cryptocurrency market is relatively small – $ 300 billion. After all, this is ten times more than at the beginning of the year.
The potential affirmation of the trade in Bitcoin futures means that digital assets can soon become quite popular. Co-director of Themis Trading LLC, Joseph Saluzzi, says that cryptocurrency derivatives are risky. Furthermore, they legitimize assets with prices received from unregulated exchanges subject to manipulation and fraud.
According to Saluzzi, this situation in the future has every chance to look like collateralized debt obligations, which contributed to the financial crisis of 2008. “Cryptocurrency will make it attractive to be invested in”, he says.
Risks related to crypto-currencies can also spread to the entire economy if the crypto credits gain popularity. And while the idea is still in its infancy, there are already startups offering dollar loans in exchange for digital assets such as Bitcoin. If these assets collapsed, the borrowers’ ability to repay the debt would also be lost.
Tad Rivelle, co-director of the Metropolitan West Total Return Bond Fund, shows the growing gap between the value of US household assets and GDP growth. This is a sign that the economy is heading for a fall. This difference is greater than the one before the bubbles that preceded the two known recessions: the dot-com crash in 2001 and the 2008 crisis. According to him, the most worry is now the policy of low and negative interest rates. Moreover, it contributes to higher prices and forces investors to take more risky decisions.
David Preiser, the member of the board of directors of the investment bank Houlihan Lokey Inc., believes that the next crisis will occur because of the loss of confidence in any region. Praiser believes that such regions can become the European Union and the euro area. He says that for a long time the Europeans worked together, but everything changed after the UK withdrew from the EU. Preiser emphasizes that when the next crisis occurs in the euro area, the confidence that the Union will rally will be much less.
Ryutaro Kono, a senior economist at the Japanese division of BNP Paribas, says that Japan’s fiscal easing. Also, it carries risks. Unless drastic measures are taken to eliminate the financial problems of the country. According to Kono, the yen could fall to 150 units per dollar – compared to about a 111 yen now. This can increase inflation from the current 0.7% to 4-5% or even higher.
According to the International Monetary Fund, Japan has the largest public debt of industrialized countries. It equals to about 240% of GDP. The possible reason for the weakening of the yen may also be the downgrade of the country’s credit rating. Kono says that because of this, it will be more difficult for creditors to borrow foreign currency. This in turn will force them to “sell the yen to buy dollars, as it was during the 1998 financial crisis” in Japan.
Sir Michael Hintze, head of CQS U.K. LLP, believes that one thing that can turn all the assumptions about global growth is another decline in oil prices. “Such a situation can provoke large-scale consequences”, says Hintze. Also, he adds that a mark of $ 35 per barrel could be a turning point. Hintze says investors will be very unhappy if they ignore this moment and its harmful consequences on the world economy.
Absence of the right to an error
Since mid-2018, only one organization, The Bank of New York Mellon, will be in charge of securities for almost $ 2 trillion. It received them from so-called repurchase transactions. It means a purchase or sale of a security with an obligation to repurchase or purchase after a certain period in advance agreed on the price. JPMorgan Chase, its long-time rival, decided to withdraw from this sphere.
The Bank of New York Mellon has invested billions in upgrading and modernizing its technologies. However, some investors fear that any malfunction could damage the bond markets. “It is troubling that the market can suffer only because of one mistake. This is not an ideal situation”, says Adam Dean, Managing Director of Square 1 Investment Management Inc.
The scale of the next crisis
According to Deepak Gulati, General Director of Argentiere Capital AG, the next crisis will have more consequences than the past. While the last crisis “was about greed, the next crisis will be about the need,” he says. “Then we had about 15 investment banks trying to make a profit. Now thousands of market participants hunt for money”, Gulati notes.
Dan Fass, an investor with 59 years of experience, says he is an optimist. But even he began to notice changes in the mood of partners – he said, they became cautious, especially in Asia. “Usually, our clients decide to invest in assets in the US, but recently they are investing money elsewhere”, says Fass.