During the last Global Financial Crisis of 2007-2009, the sudden collapse of the US sub-prime mortgage triggered the lost of confidence in the global financial system. During the Asian Financial Crisis of 1997-98, the sudden devaluation of Thai Baht sparked a contagion of flight of capitals from other Asian nations as well, like Indonesia, South Korea, Malaysia. These countries did not have sufficient reserves to protect their currencies from attack.
Both crises were debt-induced crises. They did not see the impending crises before they blew up in their faces. Have nations and the banking communities learned from both episodes?
The US had strengthened its banking system. The Asian countries have build up their foreign reserves and depend less on government borrowings in order to prevent a repeat of the crisis. The International Monetary Fund (IMF) watches the world economies and sounds the alarm if it sees a crisis unfolding.
The known flashpoints for another financial and economic crisis (if one is to develop) are:
- US and China trade tension
- Unresolved UK and EU Brexit deal
- War breaks out in the US and Iran standoff on nuclear enrichments
Despite the known risks, the US equities still shot to new record highs. Investors are banking on global monetary easing policies to drive their appetites for investing in stocks and shares. With cheap money, they bet on returns from equities. This is misplaced exuberance that the only path for equities is UP.
I am conservative. I had seen several recessions in my lifetime since the 1980s. Economic and financial bubbles ultimately developed into recessions. Complacency and exuberance are dangerous for investors. Those who borrow and bet big on equities risk losing big too. During this uncertain time, it is advisable to watch the global developments.
Copyright © 2019, limkimtong for Living Investment
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.