A Financial “Perfect Storm” May Be Brewing
By: Daniel R. Amerman, CFA
GoldSeek.com
Friday, 15 May 2015
The “Perfect Storm” of 1991, as described in the best-selling book by Sebastian Junger, resulted from massive weather systems converging to create the storm of a century.
In the financial world at this very moment, we have eight different “weather systems” that are all developing in real time. While the defenses in place may be able to easily withstand any one or two of these concerns in isolation – the danger is the increased power of a “storm” that can result from the merging of multiple systems together.
Using a weather analogy is appropriate, because there is little predictability at this point, everything is still developing (the “storm fronts” are still building), and while some of the factors are long term, others have just been emerging in the last few days and weeks. However, if several of the more powerful components were to converge – and reinforce each other – then we could very rapidly reach the point of greatest financial instability that the world has seen since 2008.
In the following sections we will assemble a step by step description of each of these eight “weather systems” and how they interrelate.
1) Very Low Interest Rates
Because of the openly stated policy of central banks such as the Federal Reserve and the European Central Bank, we currently have very low interest rates around the world.
2) Artificially Elevated Asset Prices
As explored in my recent article, “Mazes, Mice And Investor Perception Management” (link here), one of the several intentions behind forcing these very low interest rates has been to drive asset prices upwards, thereby creating artificially high market prices in the hopes of generating a “wealth effect” that is intended to change investor behavior and stimulate the economy. The economic stimulation has not occurred, but a fundamental mismatch has been created around the globe between overpriced bonds and equities, and what can be justified by the underlying fundamentals.
The Rest…HERE
