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The Next Financial Crisis Could be an Opportunity for Cryptocurrencies

Traders Magazine Online News, November 23, 2018

Patrick Tan

A German proverb goes, “Bäume wachsen nicht in den Himmel,” poorly translated, it says, “Trees don’t grow to the sky,” implying that there are natural limits to growth and improvement. Yet somehow, global economic growth and asset prices seem to be defying this German wisdom. The U.S. economy is on its longest bull run in history and it is oft said that when the last worrier turns into a fully invested optimist, the market has nowhere to go but down. But with asset prices at record highs in developed markets and stocks trading at ludicrous valuations, has the modern global economy managed to shake off the shackles of finite economic growth and development?

At the annual meetings of the International Monetary Fund and World Bank last week, the mood among the glitterati of global finance was somber and with good reason. Old and new superpower rivalries are threatening to destabilize global economic growth, while populism and tribalism have re-entered the global psyche, threatening conflict. Yet the IMF’s World Economic Outlook paints a different picture, continuing to forecast strong economic growth, with global output pipped at 3.7% this year and the next (at purchasing power parity), as it had achieved in 2017.

Chinese stock markets have only known growth.

Yet there is sufficient reason to be concerned. Ignoring the periodic U.S.-initiated trade wars, structural problems persist in emerging market economies (as evidenced by the rout of currencies such as the Indonesian rupiah and the Malaysian ringgit) and while most of these problems are due to country-specific weaknesses, there is no guarantee that the risk of contagion to economic regions is assured. Couple that with tighter financial conditions, geo-political tensions and the specter of higher oil prices (many populist governments subsidize energy costs to placate restive populations) and there is sufficient reason for concern. But the problems are not inimical to emerging markets, developed economies such as the U.S. which are experiencing low unemployment could also be in for a surprise if inflation rears its ugly head, at a time when policymakers may be hamstrung in their available tools to come even close to monetary normalization.

As Warren Buffett says,

“You only find out who is swimming naked when the tide goes out.”

The problem this time may well be that everyone has been swimming naked. The most obvious nude swimmers are those with vulnerable balance sheets?—?these are easy to spot. The more insidious risks come from companies and financial institutions with off balance sheet items, such as second and third tier banks in China with dodgy loans in questionable vehicles. When the tide and easy money go out, financial and economic distress is inevitable. Already a couple of emerging market darlings have succumbed, Argentina and Turkey being two of the most obvious examples. A big decline in risk appetite, sanctions from any manner of political fracas, trade wars or regional instability could cause a more generalized capital flight.

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