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Research Team Warns Six Economies are Most Vulnerable for Crisis

Endangered Stability
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EDITOR NOTE: Have you ever been outside of the United States for an extended period of time? If so, you’ve probably experienced the benefits of re-examining your “home country” from the outside. It gives you a different perspective, perhaps a sharper and more critical one. On that note, perhaps we should also take in the views and opinions of international economies when examining our own. Whether we agree with them or not, it’s food for thought. Japanese Bank Nomura sees the US as the nation, among six economies, as the most vulnerable to a new financial crisis. Of course, if you’ve been following us for some time, you’ll know that such news is no surprise to us. It’s not that we’re perma-bears, necessarily; it’s just that we don’t trust Fed interventions in a market that should operate a bit more freely (what happened to the notion of free markets?). Mainstream America doesn’t see the manipulative power that the Fed plays in the domestic socioeconomic landscape. That ignorance is bearish, for how else can you describe ignorance? Inflation is “transitory,” and the economy is moving according to plan, many people believe. If it pans out, those who are hedged remain hedged holding sound money--not a bad prospect. And if it doesn’t, and we fall into a new financial crisis, those who remain unhedged might not be able to reclaim the wealth that’s been lost. So, which path would you prefer?

Wouldn’t it be great to know when financial crises are about to happen?

That’s the idea behind a new warning model created by Japanese bank Nomura, with the somewhat unfortunate name Cassandra, given the Trojan priestess of Greek mythology was cursed to never be believed despite her accurate forecasts. Financial crises, they say, are better viewed through the perspective of financial cycles than business cycles.

Financial cycles are often “associated with aggressive risk taking and can be self-fulfilling, as rapid credit growth drives up asset prices, which increases collateral values and, in turn, further increases the availability of credit. Financial cycles are driven by, but also feed, an unsustainable economic expansion, which manifests itself in unsustainable credit and asset price booms,” they say.

The Singapore-based economics research team at Nomura built a model around five different early warning signs: the ratio of private credit to GDP, the debt service ratio, real equity prices, real property prices and the real effective exchange rate. Nomura says Cassandra correctly signalled two-thirds of the past 53 crises in 40 countries since the early 1990s, and it is currently warning that six economies – the U.S., Japan, Germany, Taiwan, Sweden and Netherlands – appear vulnerable to financial crises over the next 12 quarters.

six economies

Nomura also tested for interest-rate and climate change risk — and adding those to the model, the overall scores rose but the number of countries at the threshold to crisis vulnerability actually fell, as Sweden would drop out.

PCE prices accelerate

The Fed’s preferred inflation measure, the PCE price index, accelerated in May to 3.9% year-over-year from 3.6%, while personal income fell 2% and consumer spending was flat. The University of Michigan’s consumer-sentiment index is due shortly after the open.

Nike NKE, +15.53% shares are set to rally as the athletic apparel maker trounced earnings expectations, buoyed by direct sales. Rival Adidas ADS, +6.44% rose more than 5% in Frankfurt.

Delivery service provider FedEx FDX, -3.63% may see pressure as earnings came in just about in line with expectations, while its earnings forecast was above Wall Street estimates.

Streaming service Netflix NFLX, +1.74% was upgraded to outperfrom from neutral at Credit Suisse.

What the News Means for You and Your Money

The U.K. competition regulator is investigating Amazon AMZN, -1.38% and Alphabet’s GOOGL, +0.01% Google for not clamping down on fake product reviews. EBay EBAY, +2.00% said it is now planning to back $5 billion of shares this year, compared with $2 billion under a previous plan.

U.S. stock futures ES00, 0.05% NQ00, 0.07% leaned higher, after the 30th record finish for the S&P 500 SPX, +0.33% on Thursday. The yield on the 10-year Treasury TMUBMUSD10Y, 1.525% remained below 1.50%.

A sweet spot for credit?

six economies

Credit thrives in a slow but positive growth outlook, say fund managers at PineBridge Investments. When the new orders component of the Institute for Supply Management’s manufacturing index starts falling but remains above the 50% mark indicating expansion, that’s when credit thrives, and they are particular fans of emerging market credit which has lagged other assets. They more broadly say they are dialling back risk, but highlight Europe and Japan as regions to buy stocks as vaccination rates are ramping up.

Original post from MarketWatch

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