We are all prisoners of our experiences. For me and the people of my generation, who now take major decisions in finance and investment, our experience has involved huge financial bubbles and crises in the Western world, and an unprecedented set of crises in the emerging world. Does this mean that we will spend a lot of time thinking about potential crises in the future?
The market research team at Deutsche Bank, led by Jim Raid, does not think so. This week produced the annual survey of assets in the long term, almost entirely devoted to the “next financial crisis.”
It is a tremendous and excellent research, I will try to review the most interesting points in it. First, the era in which we live is experiencing more financial crises than before. This is true at the global level, and it appears with clear statistics. A major point in which crises began to accumulate: August 1971, when President Richard Nixon ended the Bretton Woods Agreement, ending the peg to the dollar and eventually most other currencies.
Prior to that point, gold had lost an average of 1.5 percent per annum “in real terms” since 1900. Since the end of Bretton Woods, an average return of 3.7 percent had been recorded. US equities are 6.4 and 6.2 percent.
At the same time, the authors argue that the move to currencies backed by government power rather than the supply of gold extracted from the land has enabled the accumulation of debt in an unprecedented manner. Their appreciation of global stimulus in the decade since the crisis, which combines the printing of extra money and the widening deficit in government budgets, is $ 34 trillion. Leaving aside the limitations of the gold standard at least gave governments the option of dealing with any crisis by injecting new money, which they did.
In a crisis-prone system with unprecedented debt, this means that we have the longest period of calm in two decades and that the chances of a future crisis are enormous.
But perhaps the most troubling part of the Deutsche study is the huge range of potential triggers of the crisis. They could be driven by a recession “that would find governments exhausted and the asset prices becoming open” or be driven by deconstruction efforts by central banks in their attempts to withdraw from large stimulus programs. “The United States will start in a nice way next month “Which will raise interest rates and trigger a state of collapse, or be driven by deflation that would bring stimulus, more negative interest rates and lead to the collapse of banks or asset prices that are well above their real value. Their prices will start In the collapse because of its lack of credibility or lack of liquidity in the market, at a time when trading stops in particular in corporate bonds, allowing the increase in sales is relatively small to swell until the landing disastrous.
If you want more exciting points, “Deutsche” reminds Italy of “a large and heavily indebted economy with a troubled banking system and unpredictable future elections.” China is still experiencing deep financial imbalances with the West, and it appears that the rate of debt growth after the crisis is unsustainable. Japan, which has been stagnating for decades, is driven by population, and the Bank of Japan’s huge balance sheet now adds a greater risk dimension. And Britain’s exit from the European Union, which could jeopardize the financial and defense infrastructure in Europe. Then there is the danger of populism everywhere. Choose what you like.
What conclusions should investors reach? The first point is that the disaster scenario group shows that Deutsche specialists simply do not know what will happen next. There are a number of scenarios they have that contradict each other. They have shown that the status quo can not continue indefinitely, but they have not shown how long it will last or how it will end. They are not alone in that. We should all act on the assumption that we do not know what will happen next.
On this basis, it would be unacceptable to exit risky assets altogether. When you put all your money in cash, if you need to grow your distraction, this is in some ways risky as putting everything in stock. You can miss that big boom of growth in stocks that will enable you to finance your pension, or whatever. As risk spreads, it will be wise to keep your investments diversified.
Secondly, however, “Deutsche” explained that there is a future crisis, and therefore it is necessary to prepare for it. This may mean gold and precious metals – but it can be difficult to trade in some circumstances and will be poorly performing under deflation.
The more prudent paths are to retain more cash. Criticism itself can be jeopardized in scenarios of great destruction. If stocks continue to rise for a period of time, which is largely a possibility, it means reducing your gains – although you will still have gains.
But the idea is that they give you some choices. It is easy – and inexpensive – to get out of a particular scenario and go to something else in a hurry when the crisis begins to manifest itself. Better to be prepared.