Many major stock indices, such as the Dow, the DAX and others are in high levels from a historic perspective. Others, like the Athens market are massively down.
What is common for all those markets is that some serious economic risks are still there. These risks can affect the stock markets, national economies, companies, households etc from a pure economic/fundamental perspective.
In the next series of articles I will try to name the main risks/threats that global economies face in my humble opinion.
The issues are not ranked by importance. I will present them as they cross my mind. Also, if things implode (again) it might be one of the less obvious issues that triggered the implosion.
So, I am starting…
Issue #1. Shadow banking
Most financial institutions are so highly leveraged through derivatives that a meltdown of one of them could create serious problems. It is estimated that total leverage of the whole financial system is bigger than the real economic GDP of all countries combined.
Remember Lehman Brothers in 2008. Everybody knew how exposed this house and the financial sector was, but still the financial crisis officially started because LB went under. I mean even if LB were saved tax payers would pay the bill. It was not saved by the Federal Reserve and taxpayers (all over the world) are still paying (and will pay more in some form or the other).
I cannot overemphasize how important it is for banks to have a healthy assets/liabilities ratio. However they choose to over-leverage themselves. In some cases it has been proven that even the management or traders had no clue what they were doing….
Management and traders know that if they over-speculate and make tons of money, big bonuses will be paid and shareholdershey will be happy due to higher stock prices. In case they screw up, they will ask the central bank for help. It is a simple choice for them to make.
I will not blame capitalism here but this is how the banking system has been working in the last couple of years. Who can deny that? At the end big boys are bailed-out while tax payers have to pay for the rescue.
Anyway, this pattern cannot go well forever so regulators should sometime get serious about the issue of shadow banking. Basel regulations are not enough.