- For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment.
- There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets.
- Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust.
- Fourth, the crises in some fragile emerging markets may worsen
- Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II
- Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict.
Dr. Roubini lists a number of potential triggers for another financial crisis.
If another crisis does develop, as we believe it will, all the central bankers will be out of ammunition to contain it.
While a stock market correction is inevitable and may not be the sole trigger of the next crisis, we should be aware of the extreme fragility of the global situation.
We have an overleveraged banking system that uses fractional reserve lending practices.
We have financial regulators who are ineffective in taming leverage and hence risk.
We have highly indebted developed nations whose governments must keep the debt merry go round turning with the corrupt banking system to continue their socialist spending agendas.
The reforms have been window dressing, and the financial heroin of near zero interest rates remains.
When the patient, the economy, is forced to go "cold turkey", the complacency will evaporate and fear will again raise its head.
The Fear Index:
Notice the high level of complacency (below horizontal line of 16) and the divergence in the RSI indicator. The MACD looks ready to cross up soon. The similarity to 2007 is growing.