Gut Feeling

I think we are getting very close to the second major crisis:

In October 1997 I made the following comments on the Juggling Dynamite Blog:

Systematic financial and economic risks – 10 October 2007
Juggling dynamite, Upsetting the status quo is the first step to valuable thought The physics of the current economic and market reality are clear. Few people seem to understand that the only way we got through the last cycle in the shape we have has been due to a very long period of very low interest rates and an asset price bubble built on debt and financial innovation. If we look at the historical relationship between interest rates, inflation and money supply, we find that the current market crisis started at a point which has probably never before precipitated a crisis. Skipping the necessary detail and analysis, the world’s financial system is very unstable and the two most likely potential outcomes are a period of high inflation and lower economic growth (stagflation) or an outright depression. The US economy has been dependent on an asset price bubble built on debt and by implication and association so has the rest of the world. The global financial system can no longer cope with the current level of debt. Take away the supply of debt and you take away the support for assets and expenditure. Take away consumer expenditure and you take away ……and so on and so on…………… We have vast structural imbalances, the collapse of these imbalances will be ramified by the natural forces of the economic multiplier. Those who disagree ignore the impact of low interest rates, hedge funds and financial engineering on extending the structural imbalances to the point where a small subsector (sub prime) of small GDP component (4 to 6% of US GDP over the last few years) can impact the entire world’s financial system. It has nothing to do with scaremongering or losing your cool, it is pure physics. Andrew Teasdale The TAMRIS Consultancy

On 16 November 1997 I also made the following comment in the Wealth Boomer Blog:, Hedging against inflation

We have seen over the last six months that we cannot use interest rate policy to curb demand pressures to the extent that is probably required and that this will force central banks to effectively relax their inflation targets if they want to avoid a severe downturn in economic activity.

On 21 January 2008 I made the following comments on the same blog: I have felt for some time now that we are in an extremely complex financial, market and economic situation, the likes of which we have probably never seen before. Since 2000 asset focused leverage and the over counter derivatives market have exploded. These developments alone, given the significant risks they posed to the financial system, would have caused concern. Unfortunately we have also had global consumers leveraged to the hilt (in particular the US). These consumers have been dependent on the rise in asset prices driven by the low interest rates and the rise in asset focused financial leverage. That the financial system has come under stress from a declining US housing market while the world economy was still growing and growing strongly was to me a great concern. If the US is entering recession then we are likely to see greater systematic financial risks from here on in and this is what markets are concerned about. The trouble is we do not know the full extent of the impact that these risks will have on economic growth and overall financial stability and, for how long. What we do know is that the potential risks are indeed monumentally significant.

On 2 April 2009 I made the following comment about market valuations and long term risks:

2 April – Gut feeling
I have had two apparently divergent gut feelings over the last few weeks: the first was that as the S&P 500 dipped below 700 that markets were standing at extremely attractive long term valuation levels; the second and divergent feeling is that a) we are nowhere near the end of the current crisis and that b) the current crisis will be followed by a secondary crisis, ultimately followed by a robust long term recovery substantiating the first of the two gut feelings and solving the paradox. While we have seen a number of positive economic indicators, we must understand that considerable structural problems remain. Consumers have cut back on spending significantly (but still nowhere enough) in the latter half of 2008 and many important purchases will have been deferred. The rebound in retail sales we are seeing may be no more than the bathwater splashing back onto the opposite side as consumers make these necessary deferred purchases. Industrial production will have fallen as demand has contracted, but in the short term will have fallen below the level of output needed to meet current demand as inventories were cut. It is therefore no surprise that output and orders would see some resurgence, but since demand will continue to fall, output will surely continue to contract.

I think we are getting close to this second crisis.

These and more comments from the earlier crisis can be found at the attached link:

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