We are approaching the anniversary of one of the worst periods in America’s economic history, the 2008 great recession. From December 2007 to early 2009, world markets tumbled after the US housing bubble burst. US homeowners lost over $3.3 trillion in equity and the stock markets worldwide lost over $6.9 trillion in shareholder money. Many large banks either went into bankruptcy, were bought out or required federal bailout. Notable names include AIG, Bear Stearns, Merrill Lynch and Lehman brothers, the holder of the largest bankruptcy in world history with over $690 billion in assets. Markets slowly responded but at a large cost, the unemployment rate in the US reached highs of almost 10% and average citizens lost thousands in retirement funds, pensions and in lots of cases, their jobs. They were also told to bear the brunt of corporations failures with the troubled asset relief program or TARP that totaled almost $700 billion dollars, though estimates have put the total amount of taxpayer money lent and spent by the US government between 2007 and 2009 at almost $3 trillion, that bailout was known for saving the American auto industry. Without the bailout General Motors and Chrysler would probably not exist today. Now that we have reached a 10 year anniversary, what is the economy like now? How are we doing? How is the rest of the world doing?
The post recession American economy has been doing pretty well in every metric. For perspective, The Dow Jones industrial average (pictured above) hit a low of 6,443.27 compared to the high of 14,164 just 16 months before that. Now America is currently riding the longest bull market of all time at 3,472 days, the Dow reached highs of almost 27,000 points and other indexes like NASDAQ and S&P 500 both hit record highs monthly. U.S. unemployment is currently at 3.9% compared to 10.3% in late 2009 and our GDP has hit a 4.2% rise in Q2 2018. Mortgage delinquencies fell to a seasonally adjusted rate of just 4.63% compared to almost 12% at the climax of the housing crisis. Companies in America are also reaching new heights in terms of growth, Apple reached a market capitalization of $1 trillion, the first company to do so. While companies like Amazon are hovering right around that $950 billion mark.
China and America are currently locked in large scale trade talks due to tariffs being imposed by each others governments. Recently, on September 17th President Trump slapped tariffs on almost 200 billion worth of goods, with another 265 billion coming if China decides to retaliate. The tariffs are set at 10% but will increase to 25% in January 1st, 2019.
China however, may have larger problems on their plate. They are a booming economy right now, Chinese banks have gained almost $15 trillion in assets in the past 10 years compared to just $2.3 trillion for US banks and they are technically the world’s largest economy by GDP. China is reaching a perplexing time in their economic history, people have been calling for a Chinese recession for a long time, but we haven’t seen a large scale pull back yet. That could change as the bubbles are beginning to burst.
Chinese stock bubbles have burst 3 times in a large way in the past 10 years, down almost 56.3% from its peak in October 2007 than down 49% from in June 2015, which is pictured above. It is currently sitting at a 4 year low with massive sell offs in Chinese markets, with the tension of the trade war and sketchy corporate operations, which leads me to my next point.
This chart is slightly outdated, but it has only gotten worse since. This chart shows some similarity to the 2008 recession, in that Chinese corporations are defaulting on bonds at a massive rate, worth almost 6.3 billion so far in 2018. Bad loans and bonds are beginning to fail and China has almost 30 trillion in corporate credit. That makes it bigger than the US treasury market and China’s total market capitalization.
Europe is in another strange spot, as the EU is at a crossroads due to growing anti-EU sentiment and massive turnouts for right wing parties all across Europe. Matteo Salvini has taken over in Italy, Swedish Democrats won a large amount seats in the Swedish Parliament, Germany’s AfD is on pace to gain substantial power next election, British officials are doing everything they can to stop brexit, Poland continues to defy the EU’s migration requirements and Hungary’s Right wing coalition won almost 70% of the vote. Europe has also seen lots of economic tension, Greece collapsed under themselves due to the fail of government bonds which led to 30% unemployment and massive austerity bills. Other countries followed in Greece’s lead not long after.
Turkey is in the midst of a massive currency/debt crisis, with the Lira plunging in value compared the $USD and $EURO. Turkish economic growth has slowly been decreasing according to ratings agencies, with a low of 2.3% expected in 2019. The Turkish government has responded with large stimulus packages in attempt to stabilize the economy.
The future of the world’s economy is really up in the air. We may be in a massive bull market worldwide, but like we saw in 2008, economic bubbles eventually burst and they are constantly forming worldwide. The U.S. looks to weather this trade war with interest rate hikes and a hopeful deal with China on the horizon, while Europe has been removing lots of stimulus and growth packages, a sign that Europe is happy with its growth, the ECB also plans to not change interest rates anytime soon. Asia, the fastest growing economic region in the world, is also seeing relative stability, though with a fear of rising interest rates if some countries debt ceiling continues to rise. We can only sit and wait for what the coming months holds for the world economy, with bull markets running wild and political tensions rising, it is full of unknowns.