“Every 7-8 years, there is a financial crisis. This is how the economy works.” I heard this statement from my teacher during my B.A. in economics. Yep, since the modernization of the economy, these were the intervals of a financial crisis.
We all know that the last financial crisis happened more than a decade, in 2008. Since then, governments took the responsibility to liquid the markets and increase their debts. How did they do it? printed money and a lot of money. They also lowered interest rates to near zero in most developed economies, making the value of money cheap and therefore, increased consumption and growth. Meaning, when interest rates will start rising above 3%, companies and some individuals will have difficulties to continue their growth. That is, of course, one of the reasons why Donald Trump opposes the Fed’s interest rate hikes plan.
Well, I’m not Nissim Taleb nor Nouriel Rubini and do not claim for a total collapse of the financial markets. Actually, the economy runs pretty well but something must happen soon – either an unpredictable crisis or a strong market correction. Just a reminder, in 2007 no one believed that the biggest financial crisis is about to strike the American and global economy.
How close are we to the next financial crisis?
Well, it’s difficult to say. The US government and other governments worldwide have dealt with the last financial crisis in an unpreceded measure. They poured money into the markets. There are two approaches to the 2008’s government solution. The first – governments took control of the financial system since 2008, more control than ever before and now, they hold the debt but they have the freedom to direct the ship. If the abandoned of the gold standard was another step to fully control the financial system, the 2008 financial crisis and the following quantitative easing program added to the power of governments to control financial markets and the economy. Some bankers believe that the 2008 financial crisis has improved the way regulators control the financial system. one of them is the former Fed chairman, Janet Yellen who said last year: “I do not see a financial crisis occurring in our lifetime.”
Yellen received harsh criticism on that comment. Those who criticize her claim that the solution to the crisis was a mistake and they hold the second approach to the 2008 solution. They believe that policymakers have worsened the economic situation, that the next crisis is just a matter of time and will be much stronger. Perhaps an apocalypse of the current economic and financial system.
Regardless of the side anyone chooses to take on the governments respond to the last crisis, stocks cannot continue rising for a sustainable period. Ten years of a consistently rising stock market will come to a turning point. No one can tell the exact time but it might be soon. All that is needed is a tiny trigger for the next financial crisis or the necessary and healthy correction in the stock markets.
Be ready – How to deal with the next financial crisis?
Most people are anxious when they hear financial crisis. You can lose your job, your house and your savings. But imagine you predict a financial crisis, similar to ‘The Big Short’ movie when some investment bankers realized the housing market bubble before the public eye was aware of it.
So you might not be the first to predict a financial crisis, not even the second but if you can be ready for it, there are some things that can be done to ‘at least’minimize loses.
- Sell your investments – Stocks, bonds, ETF’s or any security cannot rise forever, it’s not possible. It’s the nature of financial markets. If you have any suspicious that a financial crisis might occur in the next year or two, sell your investments. You will have a better opportunity to buy those securities later at lower prices.
- Short the market – To short the market means you bet that the market will go down. You have several ways to do that: through ETF’s (the safest way), indices’options, CFD’s (risky but profitable) or you can buy a safe haven asset such as gold, silver, grains or even bitcoin. Even if you are not planning to make a fortune by shorting the market, you can look at that as an investment or more accurately, as insurance.
- Wait till the crisis is over and start buying again – Warren Buffet once said: “When everybody buys, I think to sell and when everybody sells, I start buying.” Make sense – we know that so far the economy has a cycling behavior. You need to find the right moment when policymakers have concluded a financial crisis and they must expand their monetary policy. Then, buy and hold. Don’t look, just hold.
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