Are we headed for another financial meltdown? Some pundits point to mounting danger signals

Are we fast approaching another world financial crisis? In “Extraordinary Popular Delusions and the Madness of Crowds”, Charles MacKay showed the human race is incapable of learning from its own history. Since the Great Depression almost 100 years ago we’ve had the OPEC oil shock of 1973, the Asian financial crisis of 1997 and the collapse of housing and derivatives prices in 2007 – 8. That latest crisis took about 10 years for markets to return to normal.

Now some pundits are seeing another bust on the horizon. Tim Quinlan, Wells Fargo economist, says US stocks are at record valuations and tech equities have climbed back to 2000 bubble levels. Carmen Reinhart, World Bank economist, says institutions are so leveraged, “if you look at financial sector vulnerabilities in the long term, it is difficult not to be pretty bleak.” But the most worrying marshalling of dire statistics comes from Matthew Lynn, author of “The Long Depression: The Slump of 2008 to 2031“.

^{Matthew Lynn}

Writing in the Spectator, Lynn says:

• Total global debt, according to the Bank of International Settlements, rose by $24 trillion last year to an all-time high of $281 trillion.
• All told governments, companies and householders owe 360 per cent of world GDP now, compared with less than 200 per cent a decade ago.
• The total value of all quoted equities in the world has hit $110 trillion, the highest on record, and equal to 126 per cent of global output.
• The Federal Reserve’s balance sheet — basically the amount of money it has printed — has hit a record $7.5 trillion, which is 35% of US GDP.
• European Central Bank has gone a lot further, growing its balance sheet to 7 trillion euros, which is 71 per cent of the Zone’s GDP.
• The S&P is up 75 per cent from its covid low, just below the 78 per cent rise in 1932.
• Bitcoin has risen to $50,000 a unit valuing the currency collectively at $1 trillion.
• Tesla is worth $670 billion, more than Toyota and Volkswagen combined.
• The latest mania is Special Purpose Acquisition Companies or SPACS. A total of 250 were floated last year, raising $83 billion.

The Hang Seng Index is at an historic high of 29004. Its previous peaks were 29578 on 22 December 2017 and 26973 on 4 October 2007. Record levels of money are sloshing around and the HSI may go higher. But sentiment can turn at finger-snap once a triggering event occurs, something big like the Lehmann Brothers collapse.

A brave man keeps his money in equities. Where should the prudent turn? Gold? Now at US$1694 an oz gold appears to have a barrier over the US$2000 mark. Last over that level in 2020 the profit takers piled in and the price retreated. The gold price may run up again if a financial crisis occurs and the gold bugs will predict its price will more than double. The wise look at the price 20 years ago: below $300.

Matthew Lynn’s statistics showing the unprecedented piling up of debt worldwide will make investors pause. Where is all this going to end? In tears? Lynn writes, “Once the pandemic is over, we are meant to be heading for a new ‘Roaring Twenties’ as economies flare back to life, a re-run of the Great Gatsby era, but with less jazz and more Teslas. It is not impossible. But history suggests that a chaotic or catastrophic ending to the boom is more likely.”