The global financial system is again pushing the global economy into the pit of the crisis: even deeper than in 2008. Russia will also have hard times. We are connected to the U.S. and the EU with one umbilical cord. As before, on the European Union accounted for 50 percent of Russia's exports and imports (the figure for January-April 2014). The trade with the U.S. has even increased by 9 percent. If these economies suffer, Russia will suffer as well. If they have problems with their finances, we'll see bankruptcies on our home soil too.
Red lights on the dashboard
The biggest risk is the bubble in U.S. stock market. Dow Jones increased by 25 percent within 1.5 years. And it raised 2.6x since the bottom of spring 2009. A bit too much for the "developed market" of the USA, isn't it? It is usually stable, not so fluctuating and bouncing as the raging emerging markets. Yet another red light is the "stock market capitalization to GDP" indicator. And again, it is too high for the United States together with the UK: the pre-crisis value in 2008 is already exceeded. Once the markets reached them six years ago, everything collapsed. What is really going on with the finance of these famous kingdoms? Almost the same as during the flood in August 2002 in Europe.
Remember August 2002, when Germany, the Czech Republic and Austria went under water all at once? It happened because up to that moment, rivers were dry. In the early days, when the rain came, the water absorption was easy. But then it turned into a man-made disaster. The absorption broke in the mountains and the water flooded the plains. The second unexpected hit took place as a result of ordinary human negligence. Europeans have forgotten how to regulate runoff using reservoirs. The above mentioned is a physical example of what is happening today with the world finance. The bubbles threaten to burst. And then expect "flood" for everyone.
Six-year money rain
At the heart of the bubble there is the policy of quantitative easing by the Federal Reserve System. Since the end of 2008 up to the 1st quarter of 2014, the Fed assets increased by 1.9x. Its investments in U.S. debt increased over the same period by 4.9x. But this is just an effect of the printing press, the issue of money through budget expenditures. The Fed's investments in loan market instruments increased 4-fold (queasing through banks). Monetization of the U.S. economy was rapidly growing (Money saturation. Money/GDP).
Money rain was designed to spur the U.S. economy. But it was growing very slowly, bouncing down repeatedly. Since the end of 2008, U.S. gross domestic product at current prices (i.e. adjusted for inflation) grew by 14 percent only. Now the situation is the same as with the flood in Europe: the economy becomes unable to "absorb" money.
Thus, the monetary economy has grown by 2-4 times, while the real one, in current prices, by 14 percent only. Even considering the fact that one cannot directly compare the growth of money and the real size of the national economy, the gap is very large. As a result, the money unabsorbed by the real U.S. economy and unturned into inflation and price rising (inflation rate in the U.S. is only 1-2 percent) goes to the local financial market, where prices are rising. So, it's there, and above all - in stock prices. Of course, the U.S. financial market, being a bulky and branched machine, has a very high absorbing capacity. The same mechanism supports a relatively weak U.S. dollar and high commodity prices for oil, gas, food. But the absorbency is not boundless. Upon abandoning the policy of quantitative easing, even if very carefully and balanced, the Fed can (or should) pierce the bubble at some point.
The chain is no stronger than its weakest link
Dow Jones has just passed over 17,000 points. This is a historical record for large, stable companies comprising this index. But there is also NASDAQ. It is funnier and merrier. It includes more small and medium businesses. Many of them disappear along the road in the dust of bankruptcies, while others make super profits. It is NASDAQ who arranged the famous dot-com (Internet companies) bubble in 2000. Following it, there were three years of falls and off-roads on the most famous exchanges in the U.S. and Europe.
Today NASDAQ stock prices are just approaching the historical peaks of 2000. But is there someone at this exchange, who is even merrier and more desperate than dot-coms were fifteen years ago? Of course there is. This magic word "biotech." Biotechnology. In fact, it's the same bubble which is cubed this time. On the American NASDAQ stock market biotechnology companies beat all records (NBI Index). Since January 2010, their rates have tripled.
Stop, stop, stop. Maybe biotechnology business is profitable, successful? And that this differs from the dot-coms of the year 2000, which turned to zero with only the companies' names left? No, it's all the same. There is such a wonderful index under the mystic name of P/E. It shows how many times the stock price exceeds the slice of profit that it represents. This index amounts to approximately 14-17 at the market for large, stable companies of New York Stock Exchange. As for NASDAQ, where there are many small and medium, fast, financially unstable companies, P/E equals to 30-35. But in Biotech today it is approximately 800! And these Himalayas of stock prices are built in the market of totally unprofitable companies.
Their cost is overestimated. And this is the portrait of another bubble, which clearly indicates another financial storm rushing toward us from over the horizon.
Are fortresses strong enough?
Global disaster of the fall of 2008 began with the collapse of the Lehman Brothers fortress (one of the largest U.S. investment banks). The state refused to help, and it was a mistake. It triggered the following collapse. Today, the largest banks in the world are under the increasing regulatory pressure. They have to pay multibillion fines. In 2009-13, they paid $ 64 billion. And another 32 billion over the past six months. And just take a look at these names! JP Morgan, Bank of America, Credit Suisse, BNP Paribas. Sometimes the fines exceed their yearly net profit.
For the global financial system this is also a risk. The risk that some of the financial giants won't stand and, with its hands raised, will surrender at the mercy of nature. It will collapse to start a chain reaction. Finance, if they are not protected, are worse than nuclear weapons.
Dow Jones and NASDAQ do not yet show a vertical curve. But biotechnology companies index (NASDAQ Biotechnology) already graphs a "vertical wall." This is how bubbles typically look like, just before they burst. The bubble can burst within a period of 1-1.5 years. It will happen, if the Fed is unable to work the miracles of juggling and discharge the overheating in financial market.
Why do we care?
And how will this affect us? We are exhausted by sanctions, bans and offenses. I'm afraid, we will be even happy if something happens somewhere, and no one can blame Russia for this. But real life doesn't work this way. Financial woes of the U.S. will immediately reverberate in Europe and worldwide. Take the fall of 2008 as an example. Financial infection walked through each continent. Fall in demand and production was everywhere and double - in Russia.
Another example is the slowing of domestic economy in late 2013. The reason: bad situation in Europe. Thus, decline in demand for Russian raw materials. So we cannot sit it out in the safe harbor. Besides, it is not us, but other countries and continents that are at the helm now. And we are waiting on the deck to see if our proud battleship is to avoid the submerged rocks or crash.
Forecasts are often wrong. It is possible that, although seeing a clear picture of the bubble in the U.S. and partly in the UK, we are facing some new reality. That the world economy adjusts to a new long growth or any other model and will not pay attention to the small financial abscesses. That biotechnology, and, in general, the bubble in the U.S. market will be perceived as a small financial joke like Bitcoins. That global economy is going to rise, pass by and leave it all unnoticed.
The chances for optimistic scenario are very small. If we are lucky, this will be a blessing. Because it makes no sense to supplement our own problems (of which there are plenty now in Russia) with those of others.
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