Revelation from overseas crisis: what are the signs from bubble to collapse?

 Revelation from overseas crisis: what are the signs from bubble to collapse?

What are the signs before the crisis? u2460 The asset price keeps reaching a new high, and the valuation is on the high side according to the traditional standards; u2461 the market is generally bullish; u2462 the use of high leverage financing to buy assets; u2463 the influx of foreign capital / hot money; u2464 the monetary easing policy continues to be loose, and the market expects the pace of easing to accelerate.

From bubble to crisis, what is easy to ignore? u2460 Local risk points exist, but there are good economic data to cover up; u2461 discrete risk events break out, but the market is not aware of this; u2462 macro level / system design Kill Logic, market collapse.

1. what are the signs from bubble to collapse?

With the outbreak of novel coronavirus pneumonia overseas, the global risk aversion has rapidly increased. In the 30 year, the US bond yield dropped to a low level of 1.80%, and in the 10 year, the US debt fell rapidly around 20bp and was suspended from the 3 month treasury bond interest rate. In addition, the highest international gold price rose to $1690 / oz, and the three major U.S. stock indexes plummeted about 10% from their highs.

The current overseas market sentiment is similar to that of the Chinese market during the Spring Festival. Because there is no effective way to control the huge uncertainty of the epidemic, the capital market takes the lead in responding to the epidemic and its impact on the economy. Furthermore, because of different systems, the difficulty of prevention and control of overseas epidemics is significantly greater than that of China, which undoubtedly makes the risk appetite of overseas markets fall faster.

Looking back on the past two years, the short and long-term interest rates of US debt have been hanging upside down, and the market once called for the economic recession crisis to come. However, with the increase of monetary easing, US stocks continue to reach new highs. Similar to 2006, when the subprime bubble of the US was continuously blown up by funds, the economic data performed well, and the outbreak of partial risk points did not attract enough attention from the market. But the risk has been gradually formed, but it only needs time to brew out the potential of destruction.

Until now, it seems that the question about potential risk points is not so inappropriate: is the US stock bull market facing the end in the decade after the subprime mortgage crisis? Is it hard for the market to escape the fate of ten-year cycle? Is the new crown epidemic a catalyst for the next round of crisis?

What are the signs before the crisis? u2460 The asset price keeps reaching a new high, and the valuation is on the high side according to the traditional standards; u2461 the market is generally bullish; u2462 the use of high leverage financing to buy assets; u2463 the influx of foreign capital / hot money; u2464 the monetary easing policy continues to be loose, and the market expects the pace of easing to accelerate.

From bubble to crisis, what is easy to ignore? u2460 Local risk points exist, but there are good economic data to cover up; u2461 discrete risk events break out, but the market is not aware of this; u2462 macro level / system design Kill Logic, market collapse.

2. Case 1: US subprime crisis in 2008

There are sporadic risk points in the real estate market bubble constantly blowing up. For example, the foreclosure rate of subprime mortgages rose to 2.01% in the second quarter of 2006, the highest level since the fourth quarter of 2003; in September 2006, the Ministry of Commerce reported that the median price of new housing fell 9.7% year-on-year, the largest monthly drop since 1970.

The reason discrete risks are ignored is that the data show a picture of a thriving economy. From the data point of view, from 2000 to 2006, the inflation level was moderate, maintained in the range of 2-3.5%; the number of construction employment rose from 1.55 million to 1.8 million; the retail and consumer confidence data in December 2006 reached a three-year high.

In addition, the U.S. long-term interest rate is relatively low, and the 10-year Treasury bond interest rate remains at about 5%, which is inversely linked to the short-term interest rate in 2006. The driving factor behind this is the demand for new capital from overseas, and the inflow of hot money into the US capital account, which accounted for 10% of GDP by the end of 2006.

Until the break of leverage funds, the mainstream market view is that the discrete risk in the financial field will not spread to the whole market. In March 2007, the sales growth of existing houses in the United States reached a three-year high, but the subprime problem began to be exposed. The SEC said in January that with the end of the refinancing and real estate boom, the business model of many smaller subprime lenders is no longer viable.. With the sound of supervision, public opinion began to heat up.

In April 2007, New Century Financial Corporation, the second largest subprime lender in the United States, went bankrupt. In December 2006, it said that 2.5% of all loans failed to pay the first monthly payment on time. Before that, many smaller subprime lenders had gone bankrupt, but the market did not pay enough attention to them.

Federal Reserve Chairman Ben Bernanke told a congressional hearing that the impact of subprime market problems on the whole economy and financial markets seems to be under control.. US stocks hit a record high in April 2007.

Extreme phenomena appear frequently, suggesting that the bubble is near breaking up. In the middle of June 2007, the 10-year US bond yield reached 5.3%, and in the middle of July, the 90 day US bond yield reached 5%. The curve was extremely flat. Capital flows out of bonds and stocks with long cycle and flows into cash assets. Under the pressure of rising interest rates, the burden of borrowers repayment of principal and interest has increased, which has led to the rise of foreclosure rate and default rate in the real estate market, and large banks have begun to suffer serious losses.

For example, two hedge funds of Bear Stearns have been making increasing losses by investing in mortgage-backed securities (leverage ratio of 20:1). They were redeemed by investors. At Bear Stearns, they promised to provide us $32 loan assistance, and finally they are still bankrupt, but they are not large in scale and have limited impact on the market.

The crisis has entered the reflexive stage of self strengthening. Lower asset prices lead to selling, further promoting asset shrinkage and forming negative self feedback. Such reflexivity has similar effect on borrowers and lenders.

In response to the early risks, policy intervention is more effective. In August 2007, the central banks injected water into the banking system. The European Central Bank invested US $214.8 billion, the Federal Reserve provided us $38 billion to the sub-prime lending institutions, provided us $2 billion discount window to the four major banks (Citigroup, JPMorgan Chase, Bank of America, United Bank of America), and unexpectedly reduced the discount interest rate by 0.5%.

Under the active intervention, the stock market stabilizes after the collapse, and most policy makers and investors believe that the high risk of the mortgage market has been controlled and will not have a great impact on the real economy. Indeed, from the data point of view, in addition to the sharp decline in profits of some financial institutions, the economic data remained stable.

As things get worse and confidence collapses, there is no stopping the collapse of the market. With the top of the real estate market, more and more financial institutions have exposed problems, but the means to save the market is limited, even facing political and institutional constraints.

On September 18, 2007, the Federal Reserve cut interest rate by 0.5%, exceeding the market expectation of 0.25%, and US stocks rose sharply. However, in late October, the overall advance loss of subprime securities increased, and market sentiment began to deteriorate. US stocks fell 2.6% on a single day as JPMorgan wrote down $2 billion in subprime related assets.

Later, the Federal Reserve continued to cut interest rates and rescued Bear Stearns and Fannie and Freddie, but the stock market entered a free fall stage. The subprime debt market has also entered a painful stage of deleveraging. In this process, the measures to save the city and the guidance to maintain confidence will not help. Whether it is credit or stock market, we need to find the real bottom from a thorough shock clearing.

3. Case 2: European debt crisis in 2010

Too radical integration led to the initial pitfalls. According to the agreement on stability and growth of the euro area, all countries in the region must keep their fiscal deficits below 3% of GDP and take reducing fiscal deficits as the goal. At the same time, member countries must keep the ratio of national debt to GDP below 60%. These two are also important standards that other EU countries must meet to join the euro area.

At that time, Goldman Sachs disguised a public debt of up to 1 billion euros for the Greek government through the design of currency swap transactions, which made Greece meet the standards of euro zone members on its books. But in fact, Greece is far from meeting the conditions for accession.

Marginal countries promote economic growth through the mode of high consumption + trade deficit. In the traditional pattern of trade division within Europe, the labor-intensive manufacturing industry of debt countries has comparative advantages, but with the implementation of high welfare policies, wages continue to rise, while emerging market countries join the global industrial competition. The core competitiveness of these countries has declined, and the mode of high consumption + trade deficit has been widely implemented to promote economic growth.

This mode has promoted the export-oriented high growth of current account surplus countries, and over time, the external imbalance pattern of production in core countries such as Germany, Finland, Denmark, Belgium and Austria, and consumption in marginal countries such as Europe pig five has been formed within the eurozone.

As a result, the sovereign credit can not be effectively discriminated, and peripheral countries borrow foreign debt. In 2008, the financial crisis swept the whole world, and countries were too busy. Marginal countries also introduced economic stimulus programs to maintain economic stability. Although various measures maintained the stability of the financial market and supported economic recovery, their balance sheets deteriorated seriously, and the proportion of national debt to GDP and the proportion of government deficit to GDP increased significantly.

From the data, from 2008 to 2011, the leverage ratio of Greek government (GDP) rose from 110.7% to 163.3%; Ireland from 44.2% to 120.1%; Italy from 103.1% to 120.1%; Portugal from 71.6% to 106.8%.

Different from the United States, policy coordination is more difficult, resulting in the lack of timely relief programs, so the post crisis era Europe pig is hard to return. At the end of 2009, Greeces sovereign debt rating was downgraded, and the European debt crisis officially broke out. Until May 2010, the European Union only issued the first rescue plan for Greeces debt, with a total of 750 billion euros. The main reason is that Greece is required to bear the risk of default and tighten its fiscal policy, which is resisted by the bailed out countries. The problem of difficult coordination of euro zone policies has not been properly solved, which also leads to the European pig in the post crisis era.

4. Case 3: 1997 Asian financial crisis

The devaluation of Japanese yen and the real estate market bubble are the root causes of Southeast Asian crisis. In 1985, the Plaza Agreement saw a sharp appreciation of the yen; in 1987, the Louvre agreement, the Bank of Japan lowered the benchmark interest rate to 2.5%. The Japanese stock market and real estate bubble burst at the end of 90s, and the land price index dropped 50% from 1990 to 1995, and the Nikkei index dropped from 16000 to 16000. A lot of hot money poured out, looking for exports from the outside, and targeting the Southeast Asian market.

According to the data, from 1985 to 1994, the investment scale of Japan in the four Southeast Asian countries (Thailand, Malaysia, Indonesia and the Philippines) rose rapidly from US $553 million to US $3 billion 887 million, with a cumulative increase of more than 700%.

The pressure of balance of payments of Southeast Asian countries has increased, and they have opened the free exchange of capital account too early. Southeast Asian countries have implemented a fixed exchange rate system of hard pegging to the US dollar, which started to worsen with the appreciation of the US dollar in 1995. In Thailand, for example, the current account deficit expanded from $7.1 billion in 1990 to $13.2 billion in 1995.

In this context, Southeast Asian countries have accelerated the liberalization of capital account, such as relaxing the shareholding ratio of foreign-funded enterprises, opening more industries to foreign investment, lowering the registered capital of enterprises, etc. For example, by the end of 1995, Thailands foreign reserves had grown to US $35.5 billion, but its total foreign debt had risen to US $100.8 billion, with short-term foreign debt accounting for 147.8% of the total.

The main economic indicators are good, covering up the risk of weak external leverage. Take Thailand as an example. From 1990 to 1995, the total GDP increased from 856 US dollars to 168 billion US dollars, with an annual growth rate of 9%. The inflation rate remained in the range of 4-5%. The combination of high growth + low and medium inflation was close to the age of blondes in the United States. In addition, the unemployment rate is between 2-3% and declines year by year, while the government debt rate is not high, accounting for about 8% of GDP.

Foreign debt risk exposure, intervention can not prevent the exchange rate free fall, the crisis finally broke out. The external leverage risk of Southeast Asian countries is gradually recognized by the market, and foreign capital and even domestic peoples capital escape. In 1997, the Thai government began to rectify the banking system, which intensified the rapid outflow of hot money. Although the Central Bank of Thailand sold foreign exchange in the forward market to stabilize the value of the baht, this move consumed insufficient foreign exchange reserves too quickly. By June 30, 1997, Thailands foreign reserves had plummeted to US $2.8 billion. On July 2, Thailand announced that it would give up the fixed exchange rate system, the baht would float freely against the US dollar, the exchange rate would fall freely, and the crisis would spread to Southeast Asia.