The US economy is chugging along nicely.
Fuelled by tax cuts and business investment, gross domestic product grew 4.2% in the second quarter of 2018.
Unemployment is at a low 3.9%…
…and there is a lot of optimism.
The latest NFIB´s Small Business Optimism Index showed in July 2018 the second highest result in the 45 years of the survey. At a high 107.9, small business owners are expecting more jobs, sales and an even better economy for the future.
Source: Trading Economics
Yet, while there is optimism, there’s cause for concern too.
We Are No Better Off
It´s been exactly 10 years since the last crisis started, and we are no better off. In fact, you could argue we are worse.
We haven´t addressed any of the problems that brought us to the last crisis: we haven´t learned anything.
We are still highly in debt, even more so than back in 2008, and years of low interest rates and debt taking have pushed asset prices to new highs.
Australia was lucky to avoid the last crisis.
The Australian Financial Review (AFR) ran an interesting article about this recently.
As the AFR explained, Australia largely avoided the crisis by lowering interest rates, supplying a government guarantee to deposits of up to $1 million and providing liquidity to banks. As they wrote:
‘According to the RBA’s 2009 annual report, the central bank’s daily cash advances to the banking system averaged close to $4 billion in the year to June 30, 2009, up from $2.5 billion in 2007/08, and many times the daily average of $750 million in the five years before the financial crisis.
‘What’s more, in September 2007, as TV footage showed the queues snaking around Northern Rock branches, the RBA announced that from the following month it would accept residential mortgage-backed securities, backed by prime full-doc AAA-rated residential mortgages, as security for its loans…
‘This mechanism allowed Australia’s banks to borrow tens of billions of dollars from the RBA. As at the end of December 2008, the RBA held $44.7 billion in these self-securitised mortgages as security for loans. By June 2009, that had fallen to $21.2 billion.
‘This worked exceptionally well for the big four banks – the Commonwealth Bank of Australia, Westpac, NAB and ANZ Bank – which had ample high-quality residential mortgages on their balance sheets that they could package up as security for loans from the Reserve Bank.’
The next crisis could be just around the corner. It could come at any time, from anywhere.
Emerging markets…trade disputes…rising interest rates, anything could trigger it.
While businesses are optimistic, the US Federal Reserve is worried. A recent study by researchers from the US Federal Reserve in San Francisco are concerned about a possible recession.
Their main worry is the narrowing gap between short-term and long-term borrowing costs. You see, the yield curve is flattening.
As reported by Reuters:
‘Several Fed officials have cited this flattening yield curve as a reason to stop raising interest rates, since historically each time it inverts, with short-term rates rising above long-term rates, a recession follows.
‘The study, published in the San Francisco Fed’s latest Economic Letter, bolsters that view.
‘“In light of the evidence on its predictive power for recessions, the recent evolution of the yield curve suggests that recession risk might be rising,” wrote San Francisco Fed research advisers Michael Bauer and Thomas Mertens.’
It´s been 10 years since Lehman Brothers went bust. A decade since the whole system came crashing down and confidence in financial institutions around the world collapsed.
While a handful that saw it coming made a lot of money, many people saw their wealth diminish.
Back in 2008, interest rates were higher. It allowed central bankers to lower interest rates close to zero to encourage debt taking and spur growth. Yet even with fiscal and monetary stimuli we have had a decade of weak growth.
The recovery has been a sham.
Are We More Vulnerable This Time Around?
After years of long term low interest rates, central bankers around the world are starting to raise rates. And rising rates are starting to show the cracks that have been building in the global economy.
This time around we are more vulnerable. Interest rates are already low, and we are in a lot more debt.
Australia is also less prepared.
Home prices are easing, and household debt is high. Higher living expenses and low salary growth are affecting one of the big motors of growth, consumer spending.
The next one could be worse, much worse…
And it could happen any time.
The last crisis made it clear the financial industry is not looking after your interests.
That´s why you need to.
You don´t want the next one to catch you off guard.
Editor, Markets & Money