With the Chinese economy in trouble and the market down almost 20% since it’s high last May, experts seem to disagree about whether or not we are at the beginning of another giant financial crash in 2016. It doesn’t help that there is a lot of conflicting information being discussed around the crash.
Whether or not the market crash of 2016 is going to happen, it’s better to be prepared than to be unprepared if a market crash does hit. Here are three major issues to be prepared for and to have a clear understanding of if the potential crash happens.
The 3 Most Important Things To Understand About The Stock Market Crash Of 2016:
- The Chinese Growth Bubble is Popping
- Student Loan Credit Debt Obligation (CDOs)
- Economic Turmoil In Europe
1. The Chinese Bubble is Popping!
You’re going to hear a lot about the Chinese economy over the next few weeks and months. The most important thing to understand is that China was growing at an extraordinary rate. From 1978-2010, China grew to become the world’s second biggest economy. In about 3 decades, China’s Economy grew by 90 percent. This sort of growth is simply unsustainable, even if China does eventually overtake the USA in GDP.
China is also home to capital controls that are designed to keep Chinese money inside of China. Since the extraordinary rate of growth created a middle class and they cannot invest their money internationally, money poured into Chinese stocks and Chinese real estate creating various bubbles.
Chinese stocks were trading well, with above average P/E ratios, compared to other markets around the world. Then the Chinese stock crash began in late December 2015 and the Chinese stock market has lost 22.5% of it’s overall value since the beginning of 2016.
The real estate market has overbuilt as well, leading to desolate, isolated “Ghost Cities” with no inhabitants at all in the middle of major Chinese cities. If these “Ghost Cities” remain unoccupied, eventually the law of supply and demand will send the prices of Chinese real estate crashing as well. This could result in a housing crash that looks very similar to the American crash of 2008.
2. Student Loan Credit Debt Obligation
Remember in 2008 when the economy imploded because of Credit Debt Obligations on home loans, sparking the financial collapse?
Well there’s another type of CDO you need to be worried about; student loans. Instead of learning from the mistakes of the 2008 crash, the American government once again got involved in risky credit default investments similar to the mortgages which destroyed the economy in 2008.
This time, instead of mortgages, student loans have been divided and packaged up into Credit Debt Obligations. The problem is that because most student loans are backed by the government, they are given an extremely high credit rating, whether or not the student will be able to repay the loan after graduation. With more and more college graduates out of work or underemployed, a giant wave of defaults could be on the way.
It is believed that the US Government currently has guaranteed more than 1.2 trillion dollars in unpaid student loans. For perspective, that is larger than the GDP of all but 9 countries in the world.
3. Economic Turmoil in Europe
After the Great Recession, Europe went through what’s known as the sovereign debt crisis. The sovereign debt crisis led to a crisis of confidence following the collapse of Iceland’s banking system and the problems in Greece, Ireland, and Portugal in 2009.
In addition to the sovereign debt crisis, the European Central Bank, tried quantitative easing which also failed. This led to the bailouts for Greece and others, which came with austerity measures.
Austerity measures are cuts taken by a government to shrink a debt and went over badly both politically and economically. The austerity measures were a complete failure politically as they were unpopular and roundly criticized, economically the austerity measures failed by restricting growth by reducing aggregate demand.
The Greeks have recently called for a popular referendum rejecting the bailout and austerity measures. While Greece is only one country, it is feared that if they were to leave the Euro, it would trigger an exodus of Portugal, Ireland Italy and others. There’s been talk that this exodus could even mark the end of the Euro itself. Either way it appears Europe is in major economic turmoil for the foreseeable future.
Right now there’s a lot of confusion in the air, about whether or not there is going to be a stock market crash in 2016. Whether it will be a catastrophe like 2008 or a minor blip on the radar remains to be seen.