A decade ago, the global economy was blind-sided by the collapse of Lehman Brothers, and many experts chose the 10-year anniversary to voice their concerns about the state of international finance today. Surely the mistakes of the past should enable us to see more clearly now? Maybe not.
According to the federal reserve committee, who raised US interest rates last week, the US economy is in rude health. Growth is strong, they no longer need economic stimuli and they see no impact from the trade war simmering in the Pacific. But that is not the view of a growing number of experts and economists who fear we’re sleepwalking into another financial crisis.
The undercurrent of concern is reaching a crescendo. Current and former central bank chiefs and advisors have added their voices to the commentary in the last month. And it’s not just the US. Europe is just as susceptible to a crash, while the emerging economies are already mired in currency and debt difficulties.
In the UK, the retail environment feels suspiciously similar to the high street rout that followed the 2008 crash. ToysRUs, Maplin, House of Fraser, Poundworld and many others have either disappeared or are being scaled back ruthlessly.
But in the midst of all this worry, the stock market is still on a high and the property market is cruising comfortably. What are the real risks to our assets? Where will our investments be safe in the event of a crisis? Many people are turning to gold as a haven in the impending storm, should you be too?
For most owner-occupiers, a home isn’t a discretionary asset. But some people are convinced the property market is heading for a crash, and they’re selling up, renting, and looking to buy when prices plummet. Are they right?
Since the start of the year, the UK’s largest estate agent group, Countrywide, has lost over 80% of its value after profit warnings and emergency fundraisings which were sparked by high debt and a sluggish property market.
The rumble of disquiet in the market is growing, with contradictory reports on the health of the property market from the two biggest lender surveys. Halifax reports UK housing data as robust, while Nationwide reported a fall in prices in August. The disparate data doesn’t inspire confidence in the property market.
Meanwhile sentiment hasn’t been helped by comments by Bank of England governor Mark Carney who predicts economic carnage and a 35% crash in house prices over three years if the UK doesn’t reach a deal on Brexit.
Some investors with second homes have chosen to sell up now to avoid what they expect will be a sharp price correction. At least some of their returns have been invested in gold, which maintains or increases its value in times of extreme volatility. A cursory glance at growth over the past decade shows that gold has outperformed the property market over the last 12 years.
Brexit is a key uncertainty within the property market and is already a drag on property sales as homeowners who considered moving are choosing to wait it out until after March when at least the terms of Brexit (or lack thereof) will become clear.
But the uncertainty is affecting all areas of the economy and impacting on many levels already. Companies are making contingencies, relocating staff and reigning in investment while awaiting the outcome of negotiations. The post-Brexit scenarios range from doomsday to business as usual, but the majority of British people now believe no-deal is the likely outcome. Ultimately the pound is likely to be affected, which will impact on any local currency assets.
The stock markets in the UK and the US have been on the rise for most of the year, and the US in particular has hit several highs over the last few months. Despite pockets of pessimism, an unusual international political climate, the threat of a trade war and some very delicate geopolitical relationships, stocks have shown steady growth.
But what goes up must eventually come down, and there is a growing voice of knowledgeable market traders who think it might happen soon. JP Morgan last month published a note on the likelihood of a financial crisis, due within the next two years, which will wipe 20% off US stock markets, prompt a rise in US bond yields, hit energy and base metal prices and significantly impact emerging markets and currencies.
In addition, financial behemoth Goldman Sachs predicted that this year’s U.S. fiscal outlook would be “not good,” pointing out the rise in US household debt since 2008.
Unfortunately, the US and Europe have already used their arsenal of low interest rates and quantitative easing to smooth the path through the last recession. With little choice of fiscal stimulus, the next one could be even rockier.
Writing of their prediction for a recession in 2020, the authors of the JP Morgan note said “The recession’s duration is a powerful drag on returns, which should dovetail with some readers’ concerns that policy makers lack the necessary monetary and fiscal space to extract economies from the next recession.”
US economist Martin Feldstein, writing in the Wall Street Journal last month, said he sees the high asset prices mirroring the strength of the property market just before the 2008 crash. He thinks another recession is looming, and there is little the central government will be able to do to mitigate it. Even legendary hedge fund manager George Soros fears we are heading for another financial crisis.
Former UK Prime Mininester Gordon Brown is equally pessimistic. He told the Guardian last month that the world is sleepwalking into another financial crisis because there is no longer the global political will to cooperate in the event of another crash.
Investors in the stock market know it can go up or down, but if a seismic crisis hit, some equities could lose most, or all, of their value. Gold though has an intrinsic value and can never drop to zero. There may be price fluctuations, but it has been a form of currency for thousands of years and will continue to maintain value as long as it is recognised as a form of legal tender.
Should you put your money in the bank? Interest rates may have risen very slightly from their historic lows, but not by much, and the systemic risk of a bank collapse remains a possibility. Developed nation governments have tightened banking regulation in a bid to avoid a collapse on the scale of Lehman Brothers and the massive bailouts required to shore up the global banking system just a decade ago. But nobody knows if the stress tests will work, nor whether other unknown risks could impact the ability of savers to access their money in a crisis. Meanwhile banks are closing branches almost as quickly as retailers are going out of businesses.
Gold has no counterparty risk. You can either store it yourself to entirely bypass any external institutions, or choose to have it stored securely, in a facility that is fully allocated and segregated. This means that 100% of what you have purchased has been assigned to you and it has been separated from other client’s gold and is being held within your own account or vault. It’s also tax free depending on the type of gold you buy, unlike any interest made on bank deposits.
Bonds and debt
The market is awash with government and corporate bonds, and there is a real fear that defaults could ignite the next financial crisis.
“Fiscal deficits are heading for $1 trillion, and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion,” Martin Feldstein told The Telegraph, adding, “We have no ability to turn the economy around.” He thinks a financial crisis could be triggered by a spike in ten year US treasury bonds.
Ann Pettifor, the global economist who predicted the 2008 financial crisis two years before it happened told Sky news she thinks the global economy is in danger once more thanks to huge corporate debt, and the prospect of rising interest rates in the United States. She said that global debt is now more than three times the level of global GDP.
“So naturally it is not going to be repaid, and naturally there is going to come a point when that debt triggers the next crisis. And, for me, that trigger is going to be high rates of interest,” she said.
She believes the UK is “vulnerable” to another crisis because of the economic volatility caused by Brexit.
Even without the possibility of an increase in investment value, gold is attractive as a safe haven asset. Add in the expectation that the gold price will rise, and the attraction becomes much stronger.
Goldman Sachs has recently joined Bank of America Merrill Lynch in predicting a surge in the gold price over the next twelve months as the US budget deficit takes its toll on market sentiment and the impact of the tariff trade war started by Donald Trump hits the US economy. Hedge fund manager Ray Dalio is similarly predicting another downturn as the government is forced to print money to pay for the widening deficit. He says all investors should have between 5% and 10% of their assets in gold.
One investor has gone a lot further. Egyptian billionaire Naguib Sawaris told Bloomberg earlier this year that he has put half his $5.7 billion net worth into gold.
Sterling-denominated gold is at a 20-month low and major banks expect it to rise in value and many investors see this as a buying opportunity. Major hedge fund managers, investment banks and high net worth individuals are buying gold, shouldn’t you be protecting your assets too?