Economists loosely define a recession as 2 consecutive quarters of negative GDP growth. The last time this happened was during the Global Financial Crisis in 2008 – 2009.
The question that always perplexed me is why do recessions occur in the first place? Why can’t everything just go on as before.
The general answer is that in times of economic boom, capital aka money is invested in ventures that in the end turn up to be poor decisions. In the 2008 – 2009 crisis, the asset was US housing which became a deep criss due to poor risk management practices by Anglo banks. But that is for another day.
But surely many would say people would have learnt their lessons, right? Err..crypto currencies anyone?
But even though the Bitcoin crash may have caused maybe $100 – $200 billion of losses, it’s no where big enough to cause a recession. But we are actually very close to a global recession this year and following are the reasons why. Also remember that foreign funds have been selling out of Malaysia so these guys may know something.
REASON 1 CHINA , JAPAN AND EUROPE. BUT MORE IMPORTANTLY CHINA.
The first reason is to understand that the major economies, namely China, Japan and Europe are slowing down, more so for China, which had been considered at one time as a source of economic growth. Germany and Japan are probably already in a recession as of late March 2019 due to slumping industrial production.
For China, the “fuel” that could cause a severe economic recession is the unbelievable amount of non central government debt in the country, which is estimated at US$30 trillion. To understand this problem deeper, Chinese banks regularly sell off their Non Performing Loans (“NPL”) to Asset Management Companies so that their balance sheet looks better than it actually is. This year, these Asset Management Companies themselves cannot absorb any more bad debt as they are under capitalised which will cause the NPL in Chinese banks to spike up.
To the Rembau Times, China is currently in a much much worse situation than the US was in just prior to the Global Financial Crisis.
Figures released by the China Banking and Insurance Regulatory Commission (CBIRC) on Friday point to an NPL ratio of 1.89% at the end of last year, with the total NPL’s of commercial banks standing at 2 trillion yuan, unchanged form the third quarter.
“Special mention loans” – or loans considered at risk of becoming non-performing, hit 3.4 trillion yuan as of the end of 2018, compromising 3.16% of all lending by Chinese commercial banks.
– Non-performing Loan Ratio of Chinese Banks Hits Decade-long High (http://www.chinabankingnews.com/2019/01/13/non-performing-loans-chinese-banks-hit-decade-long-high/)
If the trillions of debt is the fuel, the match is Trump’s trade war that could push many companies over the edge. Currently, there is a wave of defaults by corporate and local government borrowers in China. The Chinese banking system is under stress and could topple if Trump goes ahead to raise tariffs to 25%. This is because that will cause a collapse in the Chinese stock market, and maybe bond market as well, which will affect loans made by banks against shares and the shadow banking system.
REASON 2 HONG KONG AND THE PREDICTED COLLAPSE OF THE HKD: USD PEG IN LATE 2019.
Ok this is a piece of news you should know about which is over the past year, the Hong Kong government has spending several billions to defend the currency. If this number starts to increase to $20 or $30 billion then you may see there is the beginning of a massive speculative attack. If speculators can crash the Hong Kong dollar, whose economy is already beginning to face the effects of a slowdown in China and weak property prices, they could trigger a 1997 style crisis. Pay attention to this news as this can be very important.
REASON 3 US & EUROPEAN STOCK MARKETS
Next week will be very crucial as the British parliament votes on Theresa May’s Brexit deal. This risk had been ignored ever since the results of the Brexit referendum caused losses on the world’s capital markets in 2016. If the British parliament rejects Theresa May’s deal the stock market could sell off worldwide. At the same time we have the next round of US China negotiations , which could create negative headlines as China has hardened their position since the last meeting. We have said that we do not expect a deal as we cannot see the Chinese government backing down to the US so easily since they accept as truth that Trump will not dare to affect the US stock market.
After that we have manufacturing and trade data coming out in first week April. So if things go wrong over the next 2 weeks, we could see about 8 days of continued losses on the US stock market. And we have questions on Boeing which may remain unanswered.
Now that is the mystery that people need to understand. All it takes is 8 to 10 days of continued selling on the US stock market to throw the world into a recession. This is because that will affect US consumer sentiment which could send things overboard as we are very close to the edge. For example the Dow Jones slumped about 3,000 points in December over 2 weeks so that could happen again, but if we get 2 weeks of negative news continously.
REASON 4 TRIPLE B BONDS
Currently about half of all investment grade bonds are currently rated BBB, the lowest investment rating grade possible. If we get downgrades of some bonds to below investment grade then there could be pressure in the debt market as people exit these bonds at terrible prices. This will cause losses which will contribute to more volatility in the stock market. So far rating agencies have yet to start to cut ratings aggressively, they will probably wait until the company defaults or enters bankruptcy process before they act. This risk is not yet evident but we will keep monitoring for this.
So these are some things to bear in mind. I think that we will see some big losses on the stock market followed by a little rebound. I personally think the real crash will happen from July 2019 as the Chinese economy explodes. But since first quarter results are getting terrible, the smart money may decide to disappear earlier as there is little chance of continued gravity defying upward momentum.