IMF Sounds Alarms on Multiple Threats Facing the World Financial System
This last week you saw the IMF assemble in Washington for its annual 2018 spring meeting of the minds. In this particular session, the International Monetary Fund came out with a series of stern warnings on the global economic expansion that has only just begun to synchronize across the planet. They argued that multiple threats face the global financial system, and they are growing.
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IMF Conjures Images of Risky Assets Before the Global Financial Crisis
The IMF did not at all hold back when it talked about the significant correction that hit U.S. and world markets towards the end of January through the beginning of February. Stocks in the United States dropped over 10 percent on fears of the global economy's strength being deceptive. The IMF alluded to this not being the end of the downturn with valuations for risky assets running away as they last did before the outbreak of the global financial crisis that began a decade ago in 2008.
The IMF called out these downside risks for the stability of the global financial system as increasing “somewhat” during the prior six months via its Global Financial Stability Report. They hinted at the rising dangers ahead with:
“Financial vulnerabilities, which have accumulated during years of extremely low rates and volatility, could make the road ahead bumpy and could put growth at risk.”
The banking system does not get singled out for criticism this time around. The IMF believes that the sector has increased its resiliency since the last financial crisis. Yet they caution that many nations have not yet seen through their promised reforms on the financial sector which they agreed on in the wake of the last crisis.
IMF Warns About Today's “Frothy” Assets
Many investors have breathed a collective sigh of relief now that the early 2018 correction appears to be over. The IMF is not at all convinced that the dangers have passed. They warned investors against “taking too much comfort” that the painful selloff did not cause any substantial disruptions. More to the point, they argued that the correction is potentially far from over with:
“Valuations of risky assets are still stretched, with some late stage credit cycle dynamics emerging, reminiscent of the pre-crisis period. This makes markets exposed to a sharp tightening in financial conditions, which could lead to a sudden unwinding of risk premiums and a repricing of risky assets.”
In other words, the IMF believes that the values are still “frothy” throughout a range of financial assets. They find stock valuations high as measured against the global fundamentals, particularly in America. Prices of corporate bonds are also higher than are warranted. Markets are showing leveraged loans' demand to be overheating on the many companies that possess lower credit ratings. These represent simultaneous alarms that should be sounding.
Possibilities of Interest Rate Shock, Trade Disruptions, and Jumping Inflation
The global economic monitoring agency also had a slate of concerns surrounding interest rates, trade, and inflation for the upcoming year. The IMF cautioned that at best it will be “tricky” managing a return to the normal levels of interest rates around the world. IMF Monetary and Capital Markets Director Tobias Adrian (in the forward to the report) urged for consistent communication between policy makers and central bankers so as to:
“Reduce the risks from a sharp tightening of financial conditions.”
Trade is another area of increasing concern for the global economy. Tensions have been rising and threatening to spill over into a wider trade war between the world's first and second largest economies the U.S. and China. Tobias lamented that:
“A wider escalation of protectionist measures could ultimately take a toll on the global economy and on global financial stability.”
Part of the problem is that the IMF sees complacent investors. They have not factored in the substantial risks of significantly greater inflation in the coming several years. This by itself means that markets are open to the dangers of what the IMF calls a potential “inflation surprise.”
Cryptocurrency Volatility Represents A New Risk to Financial Markets
Cryptocurrencies have become a new sector to watch for the IMF this year. As their volatility has increased dramatically over the past twelve months, the group has warned that the alternative currencies are now another cause for concern of vulnerability for the global financial system.
The peril is multiplied by the high levels of leverage players have taken on in amassing their positions in the various cryptocurrencies. Besides the danger of wild price swings that wipe out the holdings' values, there are substantial risks of fraud and theft from the presence of various “infrastructure weaknesses” of many still new crypto exchanges.
IMF Warns of Economic Troubles Beyond 2020
For now, the IMF believes that global growth is secure for this year and the next year 2019, as this chart below shows their projections:
They see trouble brewing by 2020 however. The group cautioned that the seeds of the next crisis have likely already been sown. In their most recent World Economic Outlook report they discuss that the monetary policy tightening of central banks along with a slowdown from China will dramatically impact the rates of global growth going forward.
The report cautions that:
“Global growth is projected to soften beyond the next couple of years. Once their output gaps close, most advanced economies are poised to return to potential growth well below pre-crisis averages, held back by aging populations and lackluster productivity.”
In other words, the stellar growth of past decades is not likely to be seen consistently again in the future.
Trade Wars Could Make Matters Worse Sooner
These still rosy projections for this year and next do come with a caveat from the group. The International Monetary Fund sees the danger to their projections in the form of continuing trade sanctions and retaliatory reprisals from the victim nations. Chief Economist Maurice Obstfeld of the IMF explained it this way (in a forward to the Fund's outlook):
“The first shots in a potential trade war have now been fired. Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses.”
Obstfeld was repeating IMF Managing Director Christine Lagarde's warning from earlier in April where she stated that the global trading order established over the last 70 years since the end of the Second World War risks being “torn apart.”
Gold Safeguards Your Retirement Portfolio from these Many Warnings and Threats
This last warning is a sobering reminder of the dangers that constantly threaten your likely stock- and bond-heavy retirement portfolios. The biggest concern now is that not only one asset class that has been called overvalued. Stocks, bonds, and other investments are simultaneously in the midst of bubbles today. This means that you need an alternative asset class which does not perform in lockstep to these to help offset any future market disruptions.
IRA-approved metals are that reliable alternative asset class you need. The Internal Revenue Service has made it easier than ever now to keep your Gold IRA contents in secure international locations. They allow for you to take advantage of a number of top offshore storage locations for your IRA gold today.