This Financial Meltdown Could Be An Armageddon. Making 2008 Look Like A Walk In The Park.
By Mir Mohammad Alikhan
This will be my last article on this subject because I no longer want to be the purveyor of bad news. Sometimes what you see into the future is a curse for your own self. Starting December of last year, I started to write with all evidences, proofs and analysis that I see bad times for the world financial markets including a Contagion. A Contagion, to the ones who do not know what it is, it is what it implies. A Contagious situation which others will catch as well. Like a room full of people and one person with the flu walks in and many in the room walk out with that flu as well. And all what i wrote came true. Not something to be proud of because predicting chaos hurts. For the ones who heeded to my advice and walked out of the markets last year may have benefited and that is the only solace i have.
Since I will no longer address this subject for a while. Let me be detailed in this article so all of you can understand what my analysis has been based on, repeatedly. So please be patient.
Since America is the biggest of all markets, we need to review it first. All Contagions, without fail, have been started by the U.S. Markets historically. Starting from 1929. America is the one which walks into the room with the flu. So to speak. A stable American financial market has usually been a sign of stable world financial markets.
The American markets have seen the worst week in 10 years. Entering into an absolute bear market territory. Shanghai followed. DAX of Germany wasn’t left behind either. Trump’s impeachment lingering on in 2019 which I predicted 10 days after he assumed office on February 1st 2017 in my article, may not be the biggest reason for this financial meltdown. It will only serve as fuel on the fire. America has an absolute system in place if a President is impeached. It affects the markets but it does not crash it. It is Trumps’ vagabond policy making habit that is the real curse. Openly trying to intimidate The Federal Reserve through his Tweets. Opening up new trade war frontiers in the name of nationalism. Going after American corporations with threatening statements. And the list goes on. But this is not the main reason for what I foresee. This just reaffirms to me what I foresee could possibly come true.
Some of the most unusual indicators of an economic collapse are hidden right under our eyes and they repeat themselves over and over again. Looking back all the way to 1929 crash, one indicator has never failed to warn us. Five crashes in the past century can be attributed to this phenomenon. I will talk about what that phenomenon is in a second but before that, another phenomenon that gives credible indication of an imminent crash is, irrational exuberance. Yes, when everybody starts to think that more and more good days are ahead, they jump into the markets only based on greed. And when greed takes over then rationale goes out of the window, until it walks back in and by then it’s too late. Just a few months ago, this was the behavior. Starting from the time when Dow started to take a plunge around 26,000 Plus. Nobody wanted to admit that it is not going to rebound in the long run.
One of the signs of this greed based irrationality is that when investors take higher risks in anticipation of another rally and plunge their assets into leveraging more or depleting their cash.
Historically a U.S. portfolio should be 60% in Treasuries and 40% in equities. When this trend starts to reverse, the bells of chaos are ringing softly at a distance, it is up to you if you want to listen to them. Right as we speak, “Client Allocation To Cash” as % of Assets Under Management is the lowest. Meaning only 10.8% of all assets under management are being kept in cash. The rest is being invested. This is the highest investment to cash ratio in two decades. The last one was after the crash of 2008 when 21% of investors cash was recorded in February 2009, meaning after the crash not before. In 2007 before the crash the cash ratio had dropped to 11%. Same irrational greed right before the crash. And now it’s back to the same ratio 10.8%.
U.S. credit market debt as % of the total GDP is the main indicator that I spoke earlier of. It never fails to warn us. In 1929 right before the famous crash, it was 180%. In 1933 which caused the Great Depression it was 209% of the GDP. In 1987 before the crash that shook Wall Street it was 232%. In 2000 before the Tech Bubble burst it was 279%. In 2008 before the world financial crisis it was 371%. And ladies and gentlemen, as of today again it is 378% of the GDP.
This is in addition to the U.S. corporations selling 1.75 Trillion dollars worth of bonds. Argentina, a serial defaulter has its bonds oversubscribed. The Bank of Japan and The ECB bought $2 Trillion dollars worth of assets in just one year. The FANG stocks increased in value by $1 trillion dollars. Just 4 stocks increasing in value by $1 Trillion dollars. And the list can go on and on.
Add to all this. The interconnected economy of the two giants, America and China, fighting with each other on Tariffs is no sign of comfort. BREXIT woes are right before our eyes as well threatening EU and its trade environment.
U.S. Treasury Secretary asking American banks to check their liquidity level, just last week, makes me extremely uncomfortable as well. Perhaps more so than other signs of what is to come.
Adding insult to injury, President Trump is asking the American investors to buy stocks on the dip, today. Which President in the history of the world, let alone America, has ever done that ? Trump is luring people into Equities while Debt is the real cat in the bag.
The total amount of world corporate debt alone has crossed an all time high of $247 Trillion Dollars. Yes you read it correctly. And the non-financial sector loan out of this is $186 Trillion Dollar.
This too me is an absolute failure of the world central banks. To allow such debt to accumulate by keeping the interest rates near zero and then waking up at a point when all of this debt cannot be reversed no matter what policy innovation is introduced. You can’t miraculously give life to an already dead man. No matter how good of a Physician you might be.
American Treasury Markets have tripled in size to $15.3 Trillion Dollars since the 2008 World Financial Crisis. Have we learned anything from the pre Lehman era of borrowing irrationally ? Obviously not.
China is not far behind in this irrational borrowing. The world talks about the $19 Trillion Dollar U.S. debt but not many know that China has over $40 Trillion in debt. Just for your comparison, the entire Emerging Markets put together have a total debt of $30 Trillion Dollars.
The debt is piling up by the second and there are no plans in sight to pay it off. And to top it all off, the 2 giants with the biggest share of this debt pile, America and China are at loggerheads with each other. It will not be the Equity markets that will cause this meltdown. The equity markets will be the victims. They will fall first and the debt phenomenon will be discussed or revealed later. Governments do not easily admit their mistakes. And this one is not a mistake. This one is a disaster. A disaster that will affect the entire world. And they will only admit it once the disaster has already taken place. Mark my words here.
The World Financial Crisis of 2008 will look like a walk in the park. This one, if it happens, and I pray to God that it does not, will feel like an Armageddon hitting us. And an Armageddon usually hits the entire planet. Not just selective countries.
I hope I am wrong and I want you to pray that I am. For my family’s sake and yours.
Author: Mir Mohammad AliKhan