The Warning of a Canary or Cry of a Wolf?

I had put writing investment blogs on the back burner during a very busy period of advising clients but having recently read dire warnings of impending financial crisis I thought I had better put pen to paper.

Firstly a few weeks ago veteran US investor Jim Rogers expressed fears of a financial crash on a scale that will be the worst in a lifetime. You can read the interview he gave in Business Insider via the following link:

The size of global debt especially in China and the US is a real concern to Rogers. This is not exactly an unknown but a related issue is the unprecedented experiment in global money printing or QE which will need to be unwound. Central bank balance sheets have expanded massively since the crash of 2008 with their bond buying programmes and it is fair to say offloading this debt has unknown consequences that could be very damaging to the global economy and financial system.

What I found especially interesting was Rogers’ view that the although debt is the problem the trigger for a crash could come from an unexpected source as happened in 2008, for example a US pension fund going broke.

On a similar theme the accumulation of household debt is an increasing concern in the UK. According to Professor Paul Cheshire of the London School of Economics we are on the verge of a house price crash, of up to 40% making it the worst slump since the 1990s. Many of us remember that and the resulting recession. Aside from plunging recent house buyers into negative equity a property crash will be highly damaging for the UK economy. There is a correlation here between people’s confidence to spend and changes to asset prices. If house and share prices are rising consumers feel wealthier and are more willing to spend and vice versa.

There are two key questions for me. Firstly are Rogers and Cheshire right? Are they canaries giving warnings of real dangers or merely crying wolf? Who knows? We will surely do so in a few years’ time. Secondly what impact will a crash have on asset values? If history and conventional wisdom repeats itself a crash on the scale of 2008 will send investors scurrying into highly quality AAA or AA rated government debt and safe haven currencies such as the Yen and the Swiss Franc. The price of gold may soar. In contrast property, shares and corporate bonds will collapse.

The conclusion for me is with stock markets riding high adopting a cautious risk approach in my advice to investment clients is sensible. Calling a sell-off which doesn’t happen will be less damaging to portfolio values than thinking equity markets will continue their upward trend and getting that wrong.

This blog post is my own assessment of the risks of a market sell-off. Nothing in this article should be construed as investment advice for example to invest in safe haven assets. You should seek individual advice based on your own financial circumstances before making investment decisions.