6 Potential Triggers for the Next Global Financial Crisis

 6 Potential Triggers for the Next Global Financial Crisis – BrittGillette - brittgillette@substack.com What will be the Cause of the Next Meltdown? In the aftermath of the pandemic, governments and central banks around the world over stimulated the economy with cash giveaways and ultra low interest rates. In doing so,they created bubbles in multiple asset classes throughout the world. Now, faced with inflation, governments and central banks are trying to crack down and reverse the inflationary trend. But the damage has been done. We now stand on the verge of a massiveglobal financial crisis. One of the only questions that remains is what will trigger the crisis? By definition, no one can know what the next black swan event will be. We can never be certain beforehand what the ultimate catalyst will be for a global financialcrisis, but in my opinion, these are the seven most probable triggers: 1) Chinese Property Market Meltdown Starting in 2021, the Chinese property market experienced a massive decline. Many property developers failed, construction projects stopped, and the average Chinese citizennow avoids what was once the primary savings vehicle of choice. Earlier this year, a Hong Kong court ordered Evergrande, one of the largest property developers in China to liquidate. With $300 billion in debt, it's one of the largest corporate defaults inChinese history. Country Garden, once China’s largest property developer by sales, is facing a similar fate. A creditor is currently seeking the liquidation of the defaulted Chinese developer in a Hong Kong court. The fall of these companies that once dominatedthe enormous Chinese property market indicates just how far property values have fallen. Several cities in China have lowered mortgage rates and down payment requirements in an effort to stimulate property demand, but those efforts are unlikely to impact thedepressed Chinese property market. The collapse of these companies and similar defaults on the part of other property developers and individuals threaten to spill over into the wider economy. As a result, theprospect of a deflationary spiral similar to the Great Depression is a real possibility. China is the second largest economy in the world. If it falls into the grip of a deflationary spiral similar to what the world experienced during the Great Depression,the rest of the world will find it nearly impossible to avoid the same fate. 2) Japanese Currency Crisis Meanwhile, the world’s fourth largest economy is on the verge of a major currency crisis. The Japanese yen currently sits at its lowest level relative to the U.S. dollar since1990. To prevent the situation from getting worse will likely require the Bank of Japan to raise interest rates or the U.S. Federal Reserve to lower interest rates. Given the recent persistence of inflation, it’s unlikely we’ll see the U.S. lower rates inthe short-term (absent a major financial crisis). This means the Bank of Japan may be forced to raise rates and take other measures to defend its currency. But this will cause a number of problems. First, the Japanese economy is in recession. Raising rates will only make the problem worse. Second, Japanese government debt standsat over 260% of GDP. Believe it or not, that’s twice as bad as the United States. Raising rates means more interest on the national debt, potentially sparking a debt spiral that could destroy the country. Furthermore, if the Bank of Japan starts hiking rates,this could cause a reversal of the yen carry trade (succinctly explained here), which could quickly lead to a disorderly unraveling of financial positions all over the world. Along the way, we could see margin calls and exploding derivatives positions thatcrash global financial markets. 3) German De-Industrialization Since reunification over three decades ago, Germany has served as the economic engine of Western Europe. Much of the economic might of German industry depends on cheap energyinputs, primarily in the form of Russian natural gas. Following Russia's invasion of Ukraine in 2022, Germany has failed in its ability to consistently acquire affordable natural gas and other energy sources to power its economy. Initially, Europe saw skyrocketingenergy prices. While those prices are nowhere near peak levels today, Europe still faces energy insecurity and volatile energy prices. This uncertainty has led many industrial and manufacturing companies to move their operations overseas to countries whereenergy is more consistently affordable and more readily available. Nothing better illustrates the issues faced by Germany than this September 2022 article highlighting the insolvency of four German companies in the same day. Each of thosefour German companies boasted over a century of continuous operations. These companies – all in different industries – managed to survive World War I, Weimar Germany hyperinflation, the rise of Nazi Germany, World War II, and all the decades since. Yet, theyall failed in the face of German energy insecurity. And this story is still unfolding. For example, BASF, Europe's largest chemical conglomerate, is fleeing Germany. They're investing billions of dollars in a new large-scale Chinese plant and closing someof their production in Germany. They're hiring new staff in China, while shedding German workers. As the German economy contracts, the impact could draw Europe and the rest of the world into depression. 4) U.S. Commercial Real Estate Crash The pandemic pushed millions of workers out of urban office settings and into work-from-home jobs. Four years later, many of those workers continue to work from home. Thismeans vast amounts of commercial real estate square footage are no longer needed. Keycard entry data for these offices indicate only half the pre-pandemic workforce has returned to the office on a daily basis. As companies consolidate space, renegotiate leases,and allow current leases to expire, the cash flow of commercial real estate properties has come under great strain. Making matters worse, most commercial real estate is purchased using five to seven-year loans, and 89% of those loans are interest only loans. As those loans mature, theymust be renewed at much higher interest rates. In many cases, the value of those properties has declined significantly. This means the borrower has to put up millions of dollars in additional cash in order to refinance. Instead, many are choosing to simplywalk away. This leaves the bank that made the original loan left holding the property. Properties once worth hundreds of millions of dollars are now worth pennies on the dollar. Many sit empty in hollowed out urban core areas where crime and homelessness runrampant. The implosion of commercial real estate threatens to bring down a number of regional banks with high exposure to this market. Similar to the residential housing crash whichled to the Great Financial Crisis, this threatens to drive ripple effects throughout the U.S. economy as well as the global economy. 5) Widespread Bank Failures In March 2023, a run on Silicon Valley bank triggered a wider banking crisis. Within just a few months, the United States witnessed the 2nd, 3rd, and 4th largest bank failuresin U.S. history. At the same time, Credit Suisse, a global systemically important bank, was forced into a shotgun marriage with UBS in order to avoid failure. The world managed to dodge a full-fledged banking crisis with contagion spreading to banks throughoutthe world because of a number of measures undertaken by central banks. These included the U.S. Federal Reserve Bank’s Bank Term Funding Program, which gave over $160 billion in low interest loans to the banking system. Today, the health of the U.S. banking system is not much better than it was in March 2023. According to the FDIC, U.S. banks currently sit on hundreds of billions of dollarsin unrealized losses on their bond portfolios. High interest rates also make their mortgage portfolios less valuable and place additional strain on commercial real estate portfolios. If another bank run begins, a real possibility exists it could get out-of-control,spreading contagion throughout the global banking system. 6) The Rapture of the Church I mentioned this in a previous article, “6 Global Events that Could Rock the World at Any Moment,” and it applies in this instance as well. The Bible says Jesus will comein "the twinkling of an eye" (1 Corinthians 15:52). This means, in a fraction of a second, Jesus could snatch every born again believer from the face of the earth. When that happens, it will trigger a number of second order events, and one of those is a global financial crisis. Imagine the implications. Millions of homes will sit empty,and no one will pay the mortgages or taxes. Millions of key employees and community leaders will disappear. The impacts on the global supply chain, consumer demand, and global productivity will be significant. In fact, the rapture of the church would likelyexacerbate all of the potential global financial crisis triggers discussed so far. A Global Financial Crisis is Inevitable Any of these triggers could set off a global financial crisis. The world economy now faces its greatest crisis since the Great Depression of the 1930s. According to the BuffettIndicator – a measure used by world famous investor Warren Buffett – the U.S. stock market is currently more overvalued than it was at the 1929 peak or the top of the Dot Com Bubble in 2000. The U.S. housing market is also in a bubble. Right now, the homeprice to median household income ratio is the highest in recorded history - higher than the peak of the housing bubble in 2006, which eventually led to the Great Financial Crisis. Meanwhile, U.S. Treasuries, long considered the “risk free asset,” face an enormouschallenge. The United States is $34 trillion in debt, and interest on the national debt alone is over $1 trillion per year. In fact, interest on the national debt now exceeds defense spending. This means the United States, the world’s largest economy, hasbubbles in its three largest financial markets – stocks, bonds, and real estate. On top of these massive bubbles is a global derivatives market in excess of several quadrillion dollars. No one in the world truly understands how many derivatives exist or whatwould happen to those derivatives in the event of a major global financial crisis. This means the global financial system is nothing more than a house of cards ready to topple over at any moment. In fact, such a collapse is inevitable. The only questions arewhen it will happen and what will trigger it. When the crisis takes hold, you can be sure the solution offered by politicians and central bankers throughout the world will involve granting more power and control to centralizedgovernment authorities. They’ve made no attempt to conceal their desire to roll out central bank digital currencies (CBDCs), and the next crisis will give them the opportunity they seek to offer CBDCs as “the solution.” This means tyranny on an unprecedentedscale, and it sets the stage for the mark of the beast system outlined in Revelation 13:16-17. The stage is set. A crisis is coming. But the good news is that all these things that are happening mean something else is coming – the rapture of the church andthe Second Coming of Jesus Christ!