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Eight-dimensional blockchain
(ID: eightdecimal), author: eight-dimensional research institute, forwarded with authorization.
Foreword: A person's destiny, of course, depends on personal struggle, and the process of history must also be considered. The ebb and flow of cryptocurrencies cannot escape the cycle of the financial cycle. Today in 2018, we seem to smell the same danger as ten years ago in 2008. It seems that everything has changed, but it seems that nothing has changed.
A new report from JPMorgan Chase predicts that 2020 will be the next financial crisis, but the "good news" is that it may be less bad than it has been in the past. 8D Blockchain selects Wall Street News to compile and comment on this report for readers.
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1. What changes have taken place in the past ten years?
Ten years later, in 2018, we reviewed the impact of the 2008 financial crisis on financial markets and the global economy: What factors have changed in the past ten years? What kind of future will the global market usher in?
Global sovereign debt has swelled by 26 percentage points since 2007, largely due to a roughly 41 percent increase in debt-to-GDP ratios in developed markets, in stark contrast to the 12 percent rise in emerging markets. With fiscal deficits still relatively high, there are no signs of a decline in debt levels in the foreseeable future. Fiscal lending in developed markets fell sharply by more than 8%, approaching the post-World War II low of 9% in 2009. The global fiscal deficit hit a record high of 7.3% in 2009 and is still high at 2.9% of GDP. The US fiscal deficit is expected to reach 5.4% of GDP by the end of 2019.
housing bubble
In the years leading up to the crisis, the Federal Reserve tightened monetary policy significantly: between 2004 and 2006, it raised rates by 425 basis points. Meanwhile, mortgage credit on U.S. household balance sheets has grown by nearly 45%. The market for securities products has boomed, particularly non-agency residential mortgages, with issuance growing from $125 billion in 2000 to more than $1 trillion between 2005 and 2006. Certain lenders focused on weaker lenders like subprime and alt-A, and investor demand was also strong at the time. Fannie Mae and Freddie Mac, backed by the U.S. government, bought large quantities of these mortgages from banks and sold them to investors as mortgage-backed securities. This combination of excessive leverage, improper lending standards and poor risk control eventually led to the collapse of the U.S. housing market, the "F&F" application for emergency financial assistance and the financial turmoil ten years ago. Today, US interest rates are much lower than they were then, with only about 15% of outstanding mortgages at adjustable rates.
The central bank shrinks its balance sheet
Over the past decade, central banks around the world have bought trillions of dollars in bonds to bail out the market. During quantitative easing (QE), the Federal Reserve bought a large amount of US Treasury bonds and mortgage-backed securities, making its balance sheet reach 4.5 trillion US dollars at one point. Last year, the Fed began shrinking its balance sheet, which is currently about $40 billion a month. JPMorgan Chase predicts that the Fed's balance sheet reduction will be completed in 2021, and the overall size will drop to $3 trillion. But the size of U.S. debt among them will exceed the current level and become the main asset in its huge balance sheet. In addition to the Federal Reserve, the European Central Bank will also start shrinking its balance sheet in 2019, while the expansion of the Bank of Japan’s balance sheet may continue for a while.
Optimizing Household Debt Structure
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tougher regulation
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Since 2008, the deterioration in the economy's long-term growth potential and subdued productivity growth have been key concerns. JPMorgan Chase analysis shows that in the past ten years, the global potential economic growth rate has dropped to 2.7%, which is 0.3% lower than that of ten years ago. This figure still underestimates the actual loss due to the larger regional decline. Over the ten-year period, the potential growth rate of emerging markets fell by 1.6%. Global average annual productivity growth has also fallen by almost 1 percentage point since 2012.
2. Looking to the future, how is it different from ten years ago
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Banks are no longer so vulnerable
In the wake of the financial crisis, global banks have faced unprecedented regulatory scrutiny. From a solvency and liquidity standpoint, banks are best positioned at this time if the world enters the next potential recession. "Although the ability to predict the exact sequence of events that could trigger another recession is limited, banks are unlikely to be the Achilles' heel this time around."
The S&P 500 hit an all-time high in late 2007 before falling to its lowest level during the crisis at 677 in March 2009, a drop of more than 50%. It also became the worst decline for the S&P 500 during a recession since World War II. Since then, investors in U.S. stocks have started to make a lot of money. U.S. stocks hit record highs in 2018 on the back of strong corporate earnings. So, how high can the S&P 500 go this year? JPMorgan's equity strategy department expects the S&P 500 to reach 3,000 by the end of 2018. If corporate earnings are strong enough, the S&P could rise further. Meanwhile, global trade frictions remain one of the hurdles for U.S. stocks higher.
The Rise of Passive Investing
Investors are moving away from active funds and toward funds that passively track indexes. Looking at the stock market alone, the amount of passively managed mutual funds has reached $3.5 trillion. In addition, end investors have also begun to invest steadily in the arms of exchange-traded funds (ETFs). Most ETFs are passive investments with the added benefit of liquidity. As of May 2018, the total global ETF assets reached US$5 trillion, a sharp increase from US$0.8 trillion in 2008. In addition, index funds account for 35%-45% of global equity. Investors prefer passive funds because they have low fees, low liquidity and, in many areas, higher returns net of fees than actively managed funds. However, this shift from active to passive, especially the decline of active value investors, has weakened the market's ability to prevent and recover from large-scale declines.
Fixed Income Liquidity and Market Depth
Since 2007, the global bond market has more than doubled to $57 trillion. That said, liquidity in the fixed income market has also deteriorated as banks have become less vocal in the market. After 2008, market developments wreaked havoc on liquidity, which could be a key factor in the next financial crisis. Over the past decade, the supply of high-grade bonds has increased by 50%, the circulation of U.S. investment-grade corporate bonds has fallen by 42%, and dealer positions in investment-grade bonds have plummeted by about 75%. Meanwhile, U.S. bond market liquidity remains two-thirds below pre-crisis levels. Reduced market liquidity, combined with increased passive investment, has weakened the market's ability to prevent large-scale declines in times of heightened volatility.
The perfect hedge?
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The 10-year Treasury yield fell nearly 300 basis points during the last recession, while the U.S. government bond index returned 14.3% in 2008, the third-highest annual performance on record. Overall, the Fed has less room to cut interest rates heading into the next recession than in previous recessions. However, if this pattern remains unchanged, the market will expect an easing cycle in the economy, and U.S. bond yields, especially short-term bond yields, will decline accordingly. JPMorgan expects 10-year Treasury yields to halve from their peak of 3.5% in the next recession.
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3. Inspiration and experience
A decade ago, the flaws in the financial system were on full display. Governments bailed out banks with taxpayer money from failure, central banks were forced to prop up markets with unconventional monetary policies, and regulators stepped in heavily to try to ensure a massive liquidity crisis didn't happen.
Today, the capital and leverage ratios of banks have been greatly increased; from the perspective of solvency and liquidity, the so-called "too big to fail" banks are in the best position at this time, and the complexity of the banking system has been significantly reduced. Tough stress test. At the same time, compared with 2008, the US consumer is also much better off. Household debt has fallen as a share of income, lending standards have improved substantially, and households have been less impacted by rate hikes.
Thus, the Achilles heel that sparked the financial crisis is less likely to be the cause of the next recession than it was a decade ago. But be prepared for danger in times of peace, and we have found that other risks have gradually emerged.
The structure of the lending market has also changed, with non-bank mortgages in the US increasing their share of the market from 20% before the crisis to more than 80%. Non-bank lenders are often less well-capitalized than banks and have no mechanism for deciding who takes over when they teeter on the brink of bankruptcy.
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And for markets, tail risks are likely to increase in 2019 as the impact of unprecedented monetary policy fades.
If the above risk points are not properly handled and controlled, they may become the trigger for the next round of financial crisis in 2020.
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Marko Kolanovic, Head of Quantitative at JPMorgan Chase & Co, looks ahead to the next financial crisis:
a sudden and sharp drop in the market;
The central bank launched unprecedented rescue measures;
The United States experienced social unrest once in 50 years.
The massive shift from active to passive investing (an estimated $2 trillion has gone from active to passive investing over the past decade) has meant that a class of buyers has been left out - and they can't afford to trade if valuations fall. Invest in trends. And the rise of automated trading strategies is also a factor. Index and quant funds now account for two-thirds of global assets under management, with 90% of daily trades coming from similar strategies. Many quantitative hedge funds are programmed to automatically sell when stocks fall, not necessarily based on fundamentals. Kolanovic said that if the market fell by 40% or more, it would even require the Fed to take unconventional actions such as outright stock purchases to prevent the economy from sinking into a depression.
References:
1．‘10 years after financial crises ’by J.P. Morgan Research team
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