27-Sep-2018 14:10:19

Economic crisis USA JP Morgan

Recession. The one word sends a chill down in everyone’s spine. More horrific than a story affecting the world and not just a person. With JP Morgan predicting various outcomes for the U.S Economy the markets will surely go for a toss. The most notable of U.S stock slide of 20 per cent is enough to show the gravity of the problem accompanied with the widening of national government debt. However, there are explanations of why such a phenomenon could occur with Marko concluding that the big shift away from actively investing -- through the rise of index funds, exchange-traded funds and quantitative-based trading strategies -- has escalated the danger of market disruptions.

One good news out of this all predictions is that this period of recession would be less painful than the past episodes. Yet we must not overlook the fact that there will be a loss of liquidity in financial markets and this could worsen results. There is yet another dimension of the U.S- China trade war which is becoming a concerning day after day. So how will the events unfold? We can only predict but an analysis of the time period and the ways to address it would enable us to understand whether the world is ready to take the hit or not?

According to an analysis by JP Morgan although the probability of entering recession reduces in a given period if we move from a quarter to three years. Notwithstanding, there is a valid justification to trust that the economy is for the most part more helpless against retreat late in a cycle and when it has low joblessness. This is on account of later in a cycle, there is an absence of repressed interest, more prominent trouble in discovering labourers to staff open positions and frequently higher loan fees as the Fed looks to take off swelling and resource bubbles. These issues are, to some degree, prevalent in the present condition. In any case, also, the economy in 2018 has been supported by the generous monetary improvement. As that impact blurs in 2019 and 2020, the economy ought to develop all the more gradually, and moderate development joined with some exogenous stun could trigger a subsidence, with the hazard ascending in late 2019 and 2020. Such a retreat could likewise be relied upon to result in a sharp securities exchange decrease. This leads us to ascertain the fact that indeed predictions will actualize itself sometime in the future.

So how to deal with it? As the bear market will occur the safe strategy would be to enter this bear market with a heavy allocation to Treasury bonds. There are fears attached to it due to the prevalence of very low-interest rates already which will make Treasuries have less potential to act as an offset to equity market losses. But the analysis of JP Morgan defies this stance. The reason behind this is the duration of the bonds which is long allowing for greater capital gains when interest rates fall. There are however other issues as well. Diversifying the international market during the bull regime in the U.S will not work as their performance drops when the bear market prevails in the U.S. So the best strategy would be to maintain flexibility in allocations. An effective allocation between stocks and bonds would help to tackle the issue as the international equity environment is also rapidly evolving.

So the next question is what is the effective allocation? Frankly, if the economists knew this answer then there would not be an issue at the first place. It depends on many factors and the response of central banks during the times of crisis. According to Marko Kolanovic, J.P. Morgan Chase's head quant if central banks can head off the worst of a crisis by providing a floor for asset prices, then the status quo will probably be maintained. If they don't manage to then you're spiralling into depression, social unrest and a lot more disruptive changes that can negatively affect returns for a very long time.

It will be thus interesting to see how the events unfold and the world would be able to tackle this issue effectively or not. For all we know now is that a crisis is inevitable and we have to be ready to face it and bounce back as soon as possible for our own good.

Written by-

Rohit Kumar