Financial Crisis, Round II: Is it coming soon?

Financial Crisis, Round II: Is it coming soon?
March 26, 2010

Several successful entrepreneurs have recently told me they're keeping their investments locked up in cash, fearful the financial crisis is set to return very soon, only this time it'll be worse. Much worse. And with banking reform in the US almost non-existent and countries like Greece keeping the world on edge, they might be right. So, I asked seven financial thinkers for their forecasts.

Harry S. Dent, Jr. is the author of The Great Depression Ahead. He believes the US government's debt of $12 trillion is just the tip of the iceberg. When private debt and unfunded liabilities are added, "the total US debt is more like $102 trillion or seven times GDP, more than triple that at the top of the Roaring 20s which led to the Great Depression." He's expecting stocks to crash sometime between July and September - only this time China will not be immune. He's convinced it'll "collapse when the Western world falls again," and predicts a global depression that will last well into 2012.

Investment expert, Noel Whittaker, is optimistic. He told me he's spent 50 years in the finance industry, "and there wasn't once in that period that some 'guru' wasn't forecasting financial Armageddon. Obviously, there is concern about the level of debt around the world but the economies of many countries are starting to pick up and the private sector is taking over the spending that was done by governments as part of their stimulus packages. Furthermore, the rise of the Asian countries is continuing and will continue to do so."

But Canadian economic commentator, Sheldon Filger, disagrees. He predicted the global financial crisis two years before it occurred. "Policymakers in major advanced economies have made a gamble; absorbing massive levels of public debt to backstop insolvent banks and fund stimulus spending... They will lose this gamble, I am convinced, sparking a massive sovereign debt crisis in these economies, especially the US and UK, unleashing a synchronised global depression. What is unfolding now in Greece and the other PIIGS is but a harbinger of what is to come. I predict that round two will unfold by 2012."

Phil Ruthven is an economic forecaster and Chairman of IBISWorld. He's not really worried. "There's no doubt there's a second dip coming, but not a second crisis. Governments around the world have pumped $9 trillion into the finance system. That's roughly 3 per cent of the world's finances, which is what we lost during the GFC. Also, the PIIGS group is a small part of Europe and I really cannot see that being a great danger. There is a risk there will be another decline as distinct from a recession, but that's likely to be in two to three years' time rather than in the foreseeable future."

Professor Todd Knoop from the Department of Economics and Business at Cornell College concurs. "I am not worried that another financial crisis is around the corner. History has shown us that crashes are always proceeded by booms, and while leverage ratios and lending are above where they were a year ago, they are not at the historic levels they were at before the 2009 crisis."

Margaret Lomas, the head of Destiny Financial Services and the Property Investment Professionals of Australia, has a different view. "I am of the definite opinion that the US has only just felt the beginning of what is to become a more major crisis for them. Confidence in the President is low and the sheer amount of national debt is simply a bigger version of the subprime crisis - there is little hope of them being able to even meet the interest bill on such a debt and the fallout may well be similar to that of Argentina - formerly an economically strong country now in the grips of severe financial depression."

Economist Professor Ian Harper said that deleveraging across the economy could result in a second dip or delay the recovery from the first one. There's a similar risk involved with excessive government debt but he cautioned that, "Whether the second round is more severe than the first is more difficult to predict. Governments tend to have more room to move compared with the private sector, given their powers to tax and print money. So while rising public indebtedness is certainly an issue, it need not precipitate a deeper crisis, even though it will slow recovery from the first dip, especially in the most affected countries."

Well, that's what the economic gurus foresee. What do you think? Is the global financial crisis set to return, only with more ferocity than before?

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http://blogs.theage.com.au/small-business/workinprogress/2010/03/26/financialcrisi.html

Stocks Overvalued, Recession Will Return: Meredith Whitney

Stocks Overvalued, Recession Will Return: Meredith Whitney

Published: Monday, 16 Nov 2009 | 4:51 PM ET
By: CNBC.com


Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."

In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:

She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.

The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."

The banking sector is not adequately capitalized and will need to raise more capital in the coming year.

The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

"I don't know what's going on in the market right now because it makes no sense to me," she said.

"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."

© 2009 CNBC.com