World Competitiveness Center Director says global economy faces its greatest challenges since 2008
Arturo Bris, Professor of Finance at the top-ranked IMD business school and Director of the World Competitiveness Center, recently predicted that a crisis for the global economy is likely and that not enough action is being taken to avoid it. He said that based on statistics, the world could expect a financial crisis as soon as April 2015, ending in March 2016. Bris said the cause of crisis will come from eight possible scenarios:
1.A stock market bubble
In the last year, stock markets have performed unrealistically well and at some point the situation will explode. In 2014, analysts were disappointed in the first quarter because earnings were not in line with market expectations. This means that if markets were to revert to a reasonable level with regards to earnings, there will be a stock market drop of between 30-35%.
2. Banking in China
A severe crisis could be driven by growing Chinese shadow banking, a system which consists of loans mainly to government institutions whose performance is not well monitored and not open to competition. If this system collapses, it will negatively affect the global economy.
3. Energy crisis
The United States, as the world’s largest producer of gas, could cause an energy crisis. If the US begins exporting to the rest of the world, Russia might feel threatened, causing a geopolitical storm. The US would have control over energy prices and would exert influence over countries like the UK, India and Japan.
4. Another real estate bubble
There is a risk of a property bubble forming in countries like Brazil, China, Canada or Germany. Prices are going up because availability of credit is huge and buyers are pushing prices up without realizing that they do not correspond to fundamental values.
5. Ratings & bankruptcy corporate crisis: ‘BBB as the new AA’
Companies currently have too much debt and the new norm is to have a BBB rating. In the US there are only three companies left with an AAA rating: ExxonMobil, Microsoft and Johnson & Johnson. If ratings are an indicator of bankruptcy, there will be bankruptcies across the board. If interest rates increased by 2%, half of the corporate sector would be wiped out.
6. War & conflict
Almost everywhere, except in parts of Europe and the US, there is increasing geopolitical tension, said Bris. Events like the current crisis in Crimea, could trigger a market crash, even if there is no war.
7. Increasing poverty
Overall world poverty has increased and whenever the poor become poorer, we can expect a social conflict. The crusade against income inequality could also further hinder innovation and growth by reducing the benefits of innovation, threatening the economy.
8. Cash and hyperinflation
The surplus of cash that central banks and corporations are holding could end up damaging the economy. The ECB is lending money to financial institutions that put it back into the ECB, which is a vicious circle and today Google could afford to buy a majority stake in Ireland and Microsoft could buy more than 50% of Singapore, which is immoral.
“While many economies seem to be finally rebounding since the 2008 crisis, we shouldn’t be complacent,” Bris said. “Too often we do not learn from history and do not act when faced with a crisis we know is imminent.”
Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center. He was a keynote speaker at IMD’s Orchestrating Winning Performance program where he unveiled his predictions for the future.
Bank of England’s Haldane says inflation “tiger” is prowling
By Andy Bruce and David Milliken
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.
In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.
Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.
Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.
But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.
Haldane’s comments put him at the most hawkish end among the nine members of the MPC.
Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.
“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.
(Editing by Larry King and John Stonestreet)
Bitcoin slumps 6%, heads for worst week since March
By Ritvik Carvalho
LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.
The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.
The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.
“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.
Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.
Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.
(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)
Britain sets out blueprint to keep fintech ‘crown’ after Brexit
By Huw Jones
LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.
Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.
The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.
Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.
The review recommends more flexible listing rules for fintechs to catch up with New York.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” Swinburne said.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)
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