The Next Lehman: Why 71% of the Big Money Fears the Black Swan
Five years have passed since the financial crisis brought the world to its knees. Gone are likes of Lehman Brothers and Bear Stearns among others who were driven into ruin by the epic collapse of the housing bubble. In the aftermath, life appears-- on the surface at least-- to be returning to some form of normal. Normal, that is, if you happen to have a job. It may be anemic, but there is real growth. And the truth is even housing may have bottomed. Admittedly, it's not exactly sunny, but it's no where near as dark as it was in 2008 either. Or is it?.... According to a recent survey by State Street Global Advisors, there's still plenty to worry about-especially in the sordid world of finance. In fact, the world's 3rd biggest money manager said 71% of investors worldwide are afraid the next Lehman could strike within the next twelve months. Keep in mind, we're not talking about small retail investors here. Not at all. We're talking about some of the largest and best-informed, most sophisticated pension funds, private banks, and asset managers in the world and the wide majority of them think a " black-swan" type event could strike before this time next year. A Black Swan Rerun What do they think could be the trigger for this event? Their biggest fears revolve around the next global recession, a potential euro break-up, or another episode of bank insolvency. Other concerns cited were a slowing Chinese economy, an oil price shock, or the risks of asset bubbles from unending stimulus. Thanks to ongoing debasement wars, the asset class they feel holds the biggest risk at the moment is the currency markets. These elite asset managers are not alone their fears either . To continue reading, please click here...
Five years have passed since the financial crisis brought the world to its knees.
Gone are likes of Lehman Brothers and Bear Stearns among others who were driven into ruin by the epic collapse of the housing bubble.
In the aftermath, life appears-- on the surface at least-- to be returning to some form of normal. Normal, that is, if you happen to have a job.
It may be anemic, but there is real growth. And the truth is even housing may have bottomed.
Admittedly, it's not exactly sunny, but it's no where near as dark as it was in 2008 either.
Or is it?....
According to a recent survey by State Street Global Advisors, there's still plenty to worry about-especially in the sordid world of finance.
In fact, the world's 3rd biggest money manager said 71% of investors worldwide are afraid the next Lehman could strike within the next twelve months.
Keep in mind, we're not talking about small retail investors here. Not at all.
We're talking about some of the largest and best-informed, most sophisticated pension funds, private banks, and asset managers in the world and the wide majority of them think a " black-swan" type event could strike before this time next year.
A Black Swan Rerun What do they think could be the trigger for this event?
Their biggest fears revolve around the next global recession, a potential euro break-up, or another episode of bank insolvency.
Other concerns cited were a slowing Chinese economy, an oil price shock, or the risks of asset bubbles from unending stimulus. Thanks to ongoing debasement wars, the asset class they feel holds the biggest risk at the moment is the currency markets.
These elite asset managers are not alone their fears either .
For its part, the International Monetary Fund (IMF) sees mounting risks too, with European uncertainty as the most prevalent concern.
Consequently, the IMF's is pushing its plan to harmonize the European financial system through a more integrated banking union and fiscal integration. They've warned that intensifying pressure on banks could lead to "asset shrinkage" ranging from $2.8 trillion to $4.5 trillion by end next year.
Of course, " asset shrinkage" is nothing more than a fancy way to say: "lose money"
Yet in a complete "about face", this bastion of economic wisdom has taken a dramatic new stance on austerity. After years of pushing financial aid recipients to right their fiscal ships, the IMF's Christine Lagarde now favors relaxing timelines for Greece and Spain to narrow their deficits.
Given the circumstances, you'd think this is a no-win situation. But the truth is other options do exist, and some have even worked out rather well.
The Right Way Out Of a Financial Crisis Take Iceland for instance.
Iceland was slammed by the 2008 financial crisis. It witnessed the collapse of three major banks, a stock market crash, and the blow up of potentially crushing debt for its small population of 320,000.
Not surprisingly, it all led to riots, something this peaceful and remote northern nation hadn't seen for 50 years.
The case of Iceland is fascinating, because it's a microcosm of what could have happened elsewhere.
At the start of the crisis, Iceland was in very dire straits, worse off perhaps than virtually any other developed nation. But instead of bailing out its banks, these ailing entities were simply allowed to fail.
How novel: failure as an option.
And guess what? Iceland did not fall off the face of the earth, or go back to the dark ages.
According to a recent Wall Street Journal article, unemployment in Iceland has now fallen to 5%. What's more, its economy, which naturally shrank 6.6% in 2009 and 4% in 2010, has actually now dramatically reversed course growing 2.6% in 2011.
As for 2013, Iceland is expected to grow by 3% this year. Wow.
The turnaround is pronounced enough that private Chinese business interests are investing a total of $100 million in Iceland to cultivate tourism. Beijing-based Zhongkun Investment Group will develop a hotel, racecourse and themed resort in the country's northeast.
There are a couple more things you may want to know about Iceland.
Rather than bail out their bankers, Iceland chose to arrest and jail them. Now its economy is one of the fastest growing in the developed world.
According to the IMF, the country's economic resurgence continued this year thanks to "solid policy implementation" and a stabilized currency.
So you'd think that would jolt a little common sense into the top brass "planners" over at the IMF. What's more, Iceland is (or maybe was?) a European Union candidate. But public opinion now seems decisively set against joining.
That tells me Icelanders have learned their lesson. They finally get it. And when the next financial shock comes, chances are good they'll hold up much better than most.
Protect Yourself Against the Next Black Swan Meanwhile, concerns in a bailed out Europe continue to linger. So much so that even Switzerland, the traditionally neutral landlocked country is raising its level of alert.
This non-EU member shares borders with Germany, France, Italy and Austria. But thanks to the ongoing European debt crisis, the army is concerned about potential refugees from Greece, Italy, Spain, Portugal, and even France.
In fact, Swiss Defense Minister Ueli Maurer recently warned that violence could escalate in Europe as a result. In order to remain prepared, Switzerland recently launched a military exercise to respond to a potential threat of instability in Europe, mobilizing 2,000 troops from infantry, air force, and special forces.
So what should you do to protect yourself against the next crisis?
Those surveyed by State Street suggested a number of strategies to hedge against possible market shocks including alternative asset allocation, real estate, and even managed futures.
But let's face it, the best available option in a crisis are commodities and precious metals-especially gold.
That's a sentiment PIMCO chief Bill Gross agrees with. His fund has over $1.8 trillion under management.
In a recent investment outlook, Gross said that unless ongoing deficit problems are resolved they will likely to lead to inflation, and the U.S. dollar would decline. Gross went on to say, "bonds would be burned to a crisp and stocks would certainly be singed: only gold and real assets would thrive within the "ring of fire'.
Call it what you will-a black swan or a ring of fire-the fact is five years of bailouts have lulled us into a false sense of comfort.
But I wouldn't get too cozy with those thoughts at the moment.
The timing may be a matter of discussion but the end result is a fact. The black swan will eventually return.
In the meantime, do your best to be a good boy scout: be prepared.
Related Articles and News:
Gone are likes of Lehman Brothers and Bear Stearns among others who were driven into ruin by the epic collapse of the housing bubble.
In the aftermath, life appears-- on the surface at least-- to be returning to some form of normal. Normal, that is, if you happen to have a job.
It may be anemic, but there is real growth. And the truth is even housing may have bottomed.
Admittedly, it's not exactly sunny, but it's no where near as dark as it was in 2008 either.
Or is it?....
According to a recent survey by State Street Global Advisors, there's still plenty to worry about-especially in the sordid world of finance.
In fact, the world's 3rd biggest money manager said 71% of investors worldwide are afraid the next Lehman could strike within the next twelve months.
Keep in mind, we're not talking about small retail investors here. Not at all.
We're talking about some of the largest and best-informed, most sophisticated pension funds, private banks, and asset managers in the world and the wide majority of them think a " black-swan" type event could strike before this time next year.
A Black Swan Rerun What do they think could be the trigger for this event?
Their biggest fears revolve around the next global recession, a potential euro break-up, or another episode of bank insolvency.
Other concerns cited were a slowing Chinese economy, an oil price shock, or the risks of asset bubbles from unending stimulus. Thanks to ongoing debasement wars, the asset class they feel holds the biggest risk at the moment is the currency markets.
These elite asset managers are not alone their fears either .
For its part, the International Monetary Fund (IMF) sees mounting risks too, with European uncertainty as the most prevalent concern.
Consequently, the IMF's is pushing its plan to harmonize the European financial system through a more integrated banking union and fiscal integration. They've warned that intensifying pressure on banks could lead to "asset shrinkage" ranging from $2.8 trillion to $4.5 trillion by end next year.
Of course, " asset shrinkage" is nothing more than a fancy way to say: "lose money"
Yet in a complete "about face", this bastion of economic wisdom has taken a dramatic new stance on austerity. After years of pushing financial aid recipients to right their fiscal ships, the IMF's Christine Lagarde now favors relaxing timelines for Greece and Spain to narrow their deficits.
Given the circumstances, you'd think this is a no-win situation. But the truth is other options do exist, and some have even worked out rather well.
The Right Way Out Of a Financial Crisis Take Iceland for instance.
Iceland was slammed by the 2008 financial crisis. It witnessed the collapse of three major banks, a stock market crash, and the blow up of potentially crushing debt for its small population of 320,000.
Not surprisingly, it all led to riots, something this peaceful and remote northern nation hadn't seen for 50 years.
The case of Iceland is fascinating, because it's a microcosm of what could have happened elsewhere.
At the start of the crisis, Iceland was in very dire straits, worse off perhaps than virtually any other developed nation. But instead of bailing out its banks, these ailing entities were simply allowed to fail.
How novel: failure as an option.
And guess what? Iceland did not fall off the face of the earth, or go back to the dark ages.
According to a recent Wall Street Journal article, unemployment in Iceland has now fallen to 5%. What's more, its economy, which naturally shrank 6.6% in 2009 and 4% in 2010, has actually now dramatically reversed course growing 2.6% in 2011.
As for 2013, Iceland is expected to grow by 3% this year. Wow.
The turnaround is pronounced enough that private Chinese business interests are investing a total of $100 million in Iceland to cultivate tourism. Beijing-based Zhongkun Investment Group will develop a hotel, racecourse and themed resort in the country's northeast.
There are a couple more things you may want to know about Iceland.
Rather than bail out their bankers, Iceland chose to arrest and jail them. Now its economy is one of the fastest growing in the developed world.
According to the IMF, the country's economic resurgence continued this year thanks to "solid policy implementation" and a stabilized currency.
So you'd think that would jolt a little common sense into the top brass "planners" over at the IMF. What's more, Iceland is (or maybe was?) a European Union candidate. But public opinion now seems decisively set against joining.
That tells me Icelanders have learned their lesson. They finally get it. And when the next financial shock comes, chances are good they'll hold up much better than most.
Protect Yourself Against the Next Black Swan Meanwhile, concerns in a bailed out Europe continue to linger. So much so that even Switzerland, the traditionally neutral landlocked country is raising its level of alert.
This non-EU member shares borders with Germany, France, Italy and Austria. But thanks to the ongoing European debt crisis, the army is concerned about potential refugees from Greece, Italy, Spain, Portugal, and even France.
In fact, Swiss Defense Minister Ueli Maurer recently warned that violence could escalate in Europe as a result. In order to remain prepared, Switzerland recently launched a military exercise to respond to a potential threat of instability in Europe, mobilizing 2,000 troops from infantry, air force, and special forces.
So what should you do to protect yourself against the next crisis?
Those surveyed by State Street suggested a number of strategies to hedge against possible market shocks including alternative asset allocation, real estate, and even managed futures.
But let's face it, the best available option in a crisis are commodities and precious metals-especially gold.
That's a sentiment PIMCO chief Bill Gross agrees with. His fund has over $1.8 trillion under management.
In a recent investment outlook, Gross said that unless ongoing deficit problems are resolved they will likely to lead to inflation, and the U.S. dollar would decline. Gross went on to say, "bonds would be burned to a crisp and stocks would certainly be singed: only gold and real assets would thrive within the "ring of fire'.
Call it what you will-a black swan or a ring of fire-the fact is five years of bailouts have lulled us into a false sense of comfort.
But I wouldn't get too cozy with those thoughts at the moment.
The timing may be a matter of discussion but the end result is a fact. The black swan will eventually return.
In the meantime, do your best to be a good boy scout: be prepared.
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About the Author
Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market - with special expertise in energy, metals, and mining stocks. Peter uses the connections he amassed over the years to exploit the moneymaking potential of every kind of commodity. As editor of Real Asset Returns, he travels around the world to dig up the latest and greatest profit opportunity. Peter has also contributed some of the most widely read and highly regarded investing articles on Money Morning. Learn more about Peter on our contributors page.