May 11, 2021

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Alex Brummer: Boom will give way to a meltdown

Boom will give way to bankruptcy: Rebound after the pandemic will generate real wealth … but it could end bloody, says Alex Brummer

during During the great financial crisis in November 2008, the Queen toured a new building at the London School of Economics and asked the professors, “Why didn’t anyone notice her?”

If there is a repeat of the meltdown in 2021, no one can say that they have not been warned.

The last to join Chorus of Concern is Warren Buffett and his partner Charlie Munger. Buffet warned of inflationary risks of a “hot” recovery.

After there were no warnings before the recession in 2007-2009, which nearly led to a decline in free-market capitalism, everyone seems to want to be able to say “I told you that” this time

Munger has also poured acid on top of the rapidly fading boom in special purpose acquisitions (Spacs) as values ​​tumbled as much as 40 per cent.

After there were no warnings before the complex situation that occurred in 2007-2009, which nearly bought up free-market capitalism as it collapses, everyone seems to want to be able to say “I told you that” this time.

The Institute for Financial Studies notes that the UK’s ratio of housing wealth to national product is higher than it was before the collapse of Japan in 1991 and subsequent lost decades.

In the United States, the Financial Industry Regulatory Authority reported that total marginal debt (cash borrowed to buy shares) totaled $ 822 billion in March 2021 from $ 479 billion a year earlier and $ 400 billion at the start of the financial crisis.

If you are not afraid enough, there is Bitcoin. At $ 54,000 in the last week of April, it was 600 percent higher than a year ago. We should also be looking at the collapse of the Archegos and Greensill hedge fund.

Past events like these, such as the fall of Bear Stearns and the escape on Northern Rock, proved much worse signs. Additionally, one can highlight the excess of junk bonds that the International Monetary Fund has warned about with unsecured corporate debt remaining at record levels of US production.

And there’s the turmoil caused by the citizen stock bubble that Reddit has created, with the help of “no-fee” trading platform Robinhood causing crazy fluctuations in stocks like Gamestop.

Each of these cases could be evidence that the entire financial system is on the verge of collapse. All are symptoms of overheating and attempts by those who call attention to them, for wisdom after the event.

But history tells us that it is the unexpected, not the unknown, that usually leads to a bad chain of events.

The numbers look big and asset prices inflated due to unprecedented amounts of liquidity pumped into the global economy.

There has been a financial increase of $ 5 trillion in the US alone, and here in the UK, Covid is helping in the range of £ 250 billion.

This is before we even think about the colossal sums of debt that were instantly converted into money by central bank buying of bonds.

Moreover, the post-pandemic recovery, which will generate real wealth, has barely begun. The Bank of England this week is expected to raise its UK growth forecast from 5 per cent to 7.5 per cent.

After past epidemics and wars, consumer spending has risen and employment has recovered. In Britain we have heard a lot about the “Cabbage Spring” and the “Roaring Twenties” boom.

The disparities that the epidemic has exaggerated can manifest itself in social unrest that makes a football fan’s invasion of Old Trafford look like a tea party.

We also know that bull markets, unrestricted debt (encouraged by near zero interest rates), and speculative bubbles, such as those found in Bitcoin, usually end in blood. Red alerts are abundant and there will be time for revenge. But not yet.