Lehman-style crisis looming, Japans prime minister warns

Posted on

The leaders of the Group of Seven nations met this week, and Japans prime minister had a stark warning for them: The world is facing a financial crisis as big as the 2008 Lehman Bros. collapse.

Falling commodity prices, led by crude oil, are the canary in the coalmine, Premier Shinzo Abe told his colleagues. Abe presented documents showing that commodity prices had fallen by 55% between 2014 and January 2016, similar to the margin by which they fell in 2008-09, Bloomberg reported.

The 2008 Lehman Bros. bankruptcy helped trigger the global financial crisis. Emerging markets particularly China, which is up to its neck in debt are seen as the main potential weak link this time around.

JPMorgan threatens U.S. stability: Of course, many other triggers exist. The U.S., which is supposedly one of the bright lights in the global economy, is itself overdue for a recession. A planned Federal Reserve interest-rate hike could strengthen the dollar further and wreak more havoc on emerging markets. Nevertheless, Fed chief Janet Yellen told a Harvard audience that the Fed might have to hike soon to have fresh ammo in case of a shock to the economy.

And just last month, regulators rejected the living wills of five major U.S. banks, singling out JPMorgan for special concern. A heavily redacted letter sent by the Federal Reserve and the FDIC to JPMorgan warned the megabank that flaws in its emergency plan pose serious adverse effects to the financial stability of the United States.

Japan which has implemented massive quantitative-easing programs and, more recently, negative interest rates in order to revive its stagnant economy was contemplating increasing the nationwide sales tax (from 8% to 10%), but Abe said he is delaying that plan because of his fears of a looming Lehman-style event.

Serious risks acknowledged: We agreed on the perception that we are facing serious risks, that the world economy is facing serious risks, Abe said in summarizing the meeting, while top aide Hiroshige Seko noted that G7 leaders voiced the view that emerging economies are in a severe situation, although there were views that the current economic situation is not a crisis.

Those clashing views resulted in the G7 not adopting Abes concerns in their post-summit communique. Instead of using Abes wording (We recognize the risk of the global economy exceeding the normal economic cycle and falling into a crisis), the final statement says that G7 nations have strengthened the resilience of our economies in order to avoid falling into another crisis.

Self-fulfilling sentiment feared: The G7 still sees growth on a positive track. The global recovery continues, but growth remains moderate and uneven, and since we last met downside risks to the global outlook have increased, its statement said. Weak demand and unaddressed structural problems are the key factors weighing on actual and potential growth.

The G7 leaders are either correct in their summation, or are in denial about the risks Abe warned about, or are afraid of talking down the global economy.

The G7 is obviously aware of the announcement effect the official communique has, Australia & New Zealand Banking Group economist Glenn Maguire said. In such a situation, warning of negative risks and sentiment can become self-fulfilling.

We have now gotten to the point where the worlds leaders are too scared to admit the truth over fears it will merely accelerate its inevitable arrival, Zero Hedge noted.

Gold emerged intact from Lehman wreckage: Almost no one except for a handful of market sages saw the 2008-09 financial crisis coming, most notably then-Fed Chairman Ben Bernanke. If Abe is correct in his concerns, then now is the time to exercise an abundance of caution and prepare with safe-haven assets such as gold and silver bullion and rare coins.

After all, what thrived when all else failed in the last crisis? Gold. Those of us who lived through the 2008 financial debacle understand the importance of having a proactive plan to help overall portfolios limit their downside risk to pure guesses by the Fed. The collapse in the markets triggered a rush to gold, and intense demand and limited supplies energized an already-established bull market that saw the price peak at all-time nominal highs in 2011.