Monday, August 18, 2014

Citi Analyst: Economy has entered "Phase 3" where Bubbles Form

Recently the Bank for International Settlements warned about asset bubbles forming around the world. Now Business Insider runs this article by Citi analyst Bob Buckland on the same topic

The reason we have to pay attention to these warnings is that if there are bubbles forming, they may come to an end quickly at some point. This could lead to a crisis situation where monetary system change moves to the forefront. Because the ending of such bubbles is impossible to predict, it is basically something we have to keep in mind all the time.

In this article Citi analyst Bob Buckland offers some things to watch for when the bubbles might end. He does indicate he thinks we may be in the "early stages" of his so called "Phase 3". If he is right, his timing would line up with many who think we will see problems in the economy in 2015. We can follow all this to see if he is right or wrong over the next year.

Here are some quotes:

"Citi analyst Rob Buckland has published this diagram of where he thinks we are in the economic cycle, and it's slightly terrifying. (We first saw the note on FT Alphaville.) Basically, we're in "Phase 3" of a four-phase credit/equity cycle."
"In Buckland’s theory — originally developed by Citi's Matt King many moons ago — that's the phase in which irrational bubbles form right before everything comes crashing down again."
"In Buckland's telling, the economy goes through four cycles.
Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered.
Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy.
Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we'd note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, Buckland says, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs!
Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: "This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets," Buckland says.
We're in Phase 3 right now, Buckland says, but we may not be very far into it."

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