How could the $220 trillion shadow banking gambling casino blow up your business prospects?
The Looming Shadow: Leveraged Shadow Banking and the 2024 Risk Horizon
As we peer into the economic crystal ball of 2024, one spectre looms large: the potential for a crisis borne from the murky depths of leveraged shadow banking. While whispers of this risk have swirled for years, the confluence of several factors – rising interest rates, geopolitical tensions, and an interconnected financial landscape – amplifies the potential for a shockwave to ripple through the global economy. As business leaders, navigating this uncharted territory requires an understanding of the threat and proactive measures to ensure our ships weather the storm.
Delving into the Shadows:
Shadow banking encompasses a vast network of non-traditional financial institutions operating outside the regulatory purview of the formal banking system. Think investment funds, hedge funds, money market funds, and other entities engaging in lending, credit extension, and other activities typically associated with banks. The key differentiator lies in their funding – they rely heavily on borrowed money (leverage) to amplify their investment capacity, amplifying potential returns, but also magnifying risk.
This reliance on leverage creates a precarious scenario. Rising interest rates, a reality in 2023, increased the cost of borrowing for shadow banks, squeezing their profit margins and potentially triggering a wave of defaults on their obligations. This domino effect could cascade through the financial system, impacting traditional banks reliant on shadow banking for liquidity and investment opportunities.
The Perfect Storm:
Beyond interest rates, several storm clouds gather on the horizon. Geopolitical tensions, particularly around resource-rich regions, could disrupt global supply chains and trigger commodity price volatility, further squeezing margins for shadow banks heavily invested in such assets. Additionally, the interconnectedness of the financial system means a crisis in one corner can rapidly spread, amplifying the overall impact.
The 2024 Risk Horizon:
While predicting the exact timing of a potential crisis is a fool’s errand, 2024 presents several worrying factors. The lagged effects of interest rate hikes could manifest, geopolitical flashpoints remain simmering, and the post-pandemic economic recovery has yet to be fully cemented. This confluence of risks creates a perfect storm for a shadow banking crisis, with potentially devastating consequences.
Protecting Your Business:
So, what can business leaders do to safeguard their organisations? Several proactive measures are key:
Strengthen Liquidity: Build robust cash reserves to weather potential disruptions in credit availability.
Diversify Funding Sources: Reduce reliance on shadow banking and diversify funding sources to traditional banks and alternative forms of financing.
Stress Test Scenarios: Run stress tests to understand your exposure to potential shadow banking-related shocks and identify vulnerabilities.
Reduce Leverage: Minimise dependence on borrowed capital to lessen the impact of rising interest rates.
Scenario Planning: Develop contingency plans for various crisis scenarios to ensure swift and decisive action when needed.
Beyond internal measures, advocating for stronger regulatory oversight of the shadow banking system is crucial. Pushing for greater transparency, capital adequacy requirements, and risk management protocols can mitigate the systemic risks emanating from this opaque corner of finance.
A Call to Action:
The potential for a shadow banking crisis in 2024 is not a foregone conclusion; it is a call to action. By understanding the risks, adopting proactive measures, and advocating for responsible regulation, we can navigate these perilous waters and ensure the continued prosperity of our businesses and the global economy. Remember, vigilance, diversification, and preparedness are our anchors in the coming storm. Let us act with foresight and build a future where shadows no longer threaten the economic sun.
The risks from shadow banking is another reason interest rate cuts in USA, EU and UK would be welcome but much needed regulation of the 220 trillion dollars invested in this area is probably not going to happen until 2025 at the earliest – if at all. Ironically the leverage problem is due to financial institutions lack of money!
Once again central banks in USA, EU and UK have been too slow to react and when they do they’ll be too late and overreact perpetuating our economic boom bust cycle
The Looming Storm: Declining Inflation, Rising Recession Risk in 2024
While headlines tout slowing inflation in the US, EU, and UK, a shadow lurks beneath the surface. Contrary to popular belief, this seemingly positive development may in fact be a harbinger of imminent recession in 2024. Understanding why requires peeling back the layers of economic realities and acknowledging the nuanced interplay between inflation, monetary policy, and economic behaviour.
From Scorching to Smoldering: The Inflation Slowdown Narrative
Over the past year, inflationary flames have licked across global economies, driven by pandemic-induced supply chain disruptions, soaring energy prices, and fiscal stimulus packages. Central banks, armed with the blunt instrument of interest rate hikes, sought to tamp down the heat. And indeed, recent data reflects a cooling trend. US inflation has dipped from a peak of 9.1% in June 2023, with similar softening observed in the EU and UK.
This downward trajectory has fueled a wave of optimism. Policymakers and pundits alike herald the successful execution of monetary tightening, envisioning a soft landing for the global economy. Some even predict inflation returning to target levels within the year.
Beneath the Surface: The Cracks in the Facade
However, this rosy outlook rests on shaky ground. The disinflationary trend, while seemingly positive, can also be a potent predictor of impending recession. Let’s explore the three key reasons why:
1. Demand Destruction, Not Harmony: Declining inflation is often achieved through demand destruction. Rising interest rates make borrowing more expensive, impacting both businesses and consumers. Business investment slows, hiring freezes become commonplace, and consumer spending weakens as disposable income shrinks. This domino effect ultimately saps economic activity, paving the way for recession.
2. The Lag Effect’s Looming Bite: Monetary policy operates with a time lag. Today’s interest rate hikes primarily impact economic activity months down the line. This means the full force of recent tightening may not be felt until 2024, potentially triggering a sudden and sharp economic downturn just as policymakers believe they’ve tamed the inflation beast.
3. Stagflationary Spectre : The disinflationary process carries the risk of morphing into stagflation, a nightmare scenario characterised by stagnant economic growth and persistent, albeit lower, inflation. This arises when businesses, burdened by higher input costs, maintain price hikes even as demand weakens. Such a scenario would severely constrain central banks’ ability to respond, trapping the economy in a quagmire.
A Perfect Storm Brewing in 2024:
Considering these factors, 2024 appears primed for a perfect economic storm. The lagged effects of aggressive interest rate hikes are likely to coincide with continued geopolitical uncertainties, energy price volatility, and ongoing supply chain disruptions. This potent cocktail could push vulnerable economies over the edge, plunging them into recession despite disinflationary trends.
Evidence Mounts, The Case Strengthens:
Empirical evidence further substantiates this gloomy outlook. Leading economic indicators, such as the Purchasing Managers’ Index (PMI) and consumer confidence surveys, are already flashing red. Business investment has plateaued, and layoffs are increasing across various sectors. Additionally, inverted yield curves, historically reliable recession predictors, have emerged in all three economies, signaling heightened investor anxiety about future economic prospects.
A Call to Action: Navigating the Coming Storm
The potential for a 2024 recession demands immediate and proactive action. Policymakers must adopt a nuanced approach, acknowledging the dual threat of inflation and recession. Continued, albeit calibrated, interest rate hikes may still be necessary to tame inflation, but fiscal measures aimed at supporting vulnerable populations and stimulating aggregate demand become crucial (boom to bust ie bailing out financial system again. Open communication with the public, emphasising transparent risk assessment and contingency plans, is also essential to maintain confidence and mitigate potential financial panic.
Individuals and businesses, too, must brace themselves for turbulent times. Building robust financial buffers, diversifying investments, and exercising prudence in spending decisions are key to weathering the storm.
Conclusion: The Coming Recession – Not a Certainty, But a Clear and Present Danger
While declining inflation may initially appear as a victory, it can mask a deeper malaise. In the context of current economic vulnerabilities and aggressive monetary tightening, the disinflationary trend in the US, EU, and UK presents a significant risk of recession in 2024. Ignoring this risk would be akin to celebrating a pyre’s dimming flames while neglecting the smoldering embers beneath. By acknowledging the impending danger and taking decisive action, policymakers and individuals alike can navigate the coming storm and emerge stronger on the other side.
Understand the growing threat of financial collapse
The Dangers to Businesses and People from Eurozone Bank Stress and Loan Defaults: An Expert Perspective
The Eurozone banking sector is facing a number of challenges, including rising interest rates, slowing economic growth, and increased loan defaults. These factors are putting stress on banks’ balance sheets and making it more difficult for them to lend to businesses and consumers. If these trends continue, they could lead to a financial crisis that would have severe consequences for businesses and people across the Eurozone.
The Impact of Eurozone Bank Stress on Businesses
Businesses rely on banks to provide them with the credit they need to operate and grow. When banks are under stress, they are more likely to tighten lending standards and raise interest rates. This can make it difficult for businesses to get the loans they need to invest in new equipment, hire new employees, and expand their operations. As a result, businesses may be forced to cut back on their spending, which can lead to slower economic growth and job losses.
In addition, businesses that are unable to obtain loans from banks may turn to riskier forms of financing, such as borrowing from high-interest lenders or taking on more debt. This can increase their financial risk and make them more vulnerable to economic downturns.
The Impact of Eurozone Bank Stress on People
People also rely on banks for a variety of financial services, such as checking and savings accounts, mortgages, and auto loans. When banks are under stress, they may reduce their hours of operation, close branches, and increase fees. This can make it more difficult for people to access the financial services they need.
In addition, if banks are forced to raise interest rates, this will make it more expensive for people to borrow money. This could lead to an increase in household debt and make it more difficult for people to make ends meet.
The Dangers of Loan Defaults
Loan defaults are a major concern for banks because they can significantly erode their capital. When a borrower defaults on a loan, the bank loses the money it lent out, and it may also have to pay legal fees and other expenses to collect the debt. This can quickly eat into the bank’s capital, which is the money it needs to operate and withstand financial shocks.
If banks are not able to maintain adequate capital levels, they may be forced to reduce their lending activities or even go bankrupt. This would have a devastating impact on the economy, as it would make it even more difficult for businesses and consumers to get the credit they need.
Policy Options to Address Eurozone Bank Stress
There are a number of policy options that could be taken to address Eurozone bank stress and reduce the risk of loan defaults. These include:
Providing additional regulatory capital relief to banks: This would help banks to build up their capital buffers and make them more resilient to financial shocks.
Encouraging banks to securitise their loans: Securitisation is a process of pooling loans together and selling them to investors as securities. This can help banks to reduce their exposure to individual borrowers and spread out their risk.
Implementing stricter lending standards: This would help to ensure that banks are only lending to borrowers who are able to repay their loans.
Improving the quality of credit data: This would help banks to make better lending decisions and reduce the risk of loan defaults.
Conclusion
Eurozone bank stress and loan defaults pose a significant threat to businesses and people across the Eurozone. If these trends continue, they could lead to a financial crisis that would have severe consequences. Policymakers need to take action to address these challenges and reduce the risk of a financial crisis.
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How do you recession-proof your business?
How can we protect from inflation?
How to prepare for inflation at home?
The impact of recession on businesses is severe. However inflation can be the precursor of a recession. Central banks are charged with the responsibility of keeping inflation under control partly to ward against recession or depression. Healthy inflation is generally regarded as 2 percent. Many countries are experiencing at least 3 times healthy inflation. Some key economies are experiencing much more than that just now. In other words the biggest economies are suffering from very unhealthy inflation levels. Most central banks have not responded fast enough and should gave started increasing interest rates earlier to control inflation. Some have not even started to control inflation. The long-tail effect of increasing interest rates means that for next 6 months at least inflation will remain out of control. The war in Ukraine may even mean inflation is uncontrollable for years. Out if control inflation leads to a recession at best and depression at worst!
Now is not the time to pat yourself on the back. Surviving pandemic was good, but the next existential threats to your business are already here or rushing towards you.
Rising inflation means that consumers and business decision-makers have the same money but it doesn’t go as far as it once did. The end result is that they buy fewer products and services. Inflation is a driver of a recession. Back to back crisis’s caused by pandemic, war, fuel, energy, fertiliser and food shortages or rising prices could result in extended global recession that turns into a global depression. The global pandemic caused the deepest recession since the Second World War and the world has used all its tools, including record low interest rates and extended Quantitative Easing QE, to scramble back out of the recession. However it means the world is particularly vulnerable just now – with economic risk management tools exhausted or trying to recover.
What Can Governments Do To Reduce Inflation
Reducing Inflation Strategies
Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. It can be caused by a variety of factors, including rising costs of production, increased demand for goods and services, and monetary policy decisions made by central banks.
Governments can take several measures to reduce inflation, including:
Monetary policy: Central banks can raise interest rates to curb inflation. Higher interest rates make borrowing more expensive, which can slow down economic growth and reduce demand for goods and services.
Fiscal policy: Governments can reduce government spending and increase taxes to slow down economic growth and reduce demand for goods and services.
Price controls: Governments can impose price controls on certain goods and services to keep prices from rising too quickly. However, this can lead to shortages and reduced incentives for producers to supply goods and services.
Supply-side policies: Governments can take steps to increase the supply of goods and services, such as by investing in infrastructure and education, and by reducing regulations that limit the ability of firms to produce goods and services.
Flexible exchange rates: Governments can allow their currency to fluctuate in value against other currencies. A stronger currency will make imports cheaper and can help to reduce inflation.
Price stability target: Central banks and governments can jointly agree on a target for inflation, and use monetary and fiscal policy to achieve that target.
It’s important to note that reducing inflation is not always the best course of action for an economy. Sometimes, a moderate level of inflation can be beneficial for economic growth, especially in developing countries. It’s important for governments to weigh the costs and benefits of different policies to reduce inflation and make the best decision for their economy.
Many central banks have an inflation target of between 2 percent and 3 percent – seen has healthy level of inflation
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In conclusion, governments have several tools at their disposal to reduce inflation, including monetary and fiscal policy, price controls, supply-side policies, flexible exchange rates, and price stability target. However, it’s important to consider the costs and benefits of each policy before implementing them.
Strategies for business survival during a recession
Businesses fold quickly during a recession. Before you know it, you are losing both suppliers and customers. Both can damage your business and even threaten an otherwise successful business survival. Set a Key Performance Indicator KPI to help you monitor your risk management in this area of your business. A Key Control Indicator KCI could be that no more than 10 percent of your key supply’s come from any single supplier. Likewise a KCI could be that no more than 10 percent comes from a single customer. If you stick to your KCI then the failure of any one customer or supplier is not going to pull your business down with their failure to manage recession risk.
What you set your KCIs at will vary depending on your financial strength, type of industry and current resources. You may never hit your KCIs but they flag up when action is needed or your progress towards better recession risk control.
Expanding your customer base is not just about expanding your business. It is about protecting your business from loss of business. Expanding your suppliers could increase the overall cost of supply during good times thereby limiting your profit. Your management team needs to decide what level of risk you are exposed to, the type of risks and your appetite and resilience to risk.
We are moving from pandemic survival to rapid business development. If you focus your energy on growing your business faster organically with new customers you can ride the economic wave through the various threats to your business.
Just before a business falls flat on its face it can seem that the world was its oyster! The world seems to be dragging itself out of the economic damage of a global pandemic. We are seeing economic expansion at or near record rates across the world. Wages are rising and many countries have unfilled job vacancies galore! What could go wrong? Answer is out of control inflation turning into a recession and high unemployment.
The world has shot its bolt. Due to the economic impact of the global pandemic central banks have slashed interest rates to the bone and in a few cases into the bone! There is no wiggle room left to cope with another economic disaster. Trouble is nobody told our political leaders and they have led us into the next economic disaster on back of an inflationary crisis on back of war, food crisis and energy crisis. You wait for a financial crisis to come around every 10 years then several come along at once!
Inflation may have given you a good opportunity to inflate your prices. The good times are slipping away. Your pricing model may have brought in easy money that will be useful. Times are changing and you may think that new opportunities are appearing for business growth.
Stay on top of your business changing needs:
Profits are cut due to rising costs due to inflationary pressures. Make sure you focus on market prices to seize opportunities appearing in your marketplace. Instead of raising your prices think about reducing your costs or making your offering more attractive to new customers.
Cash is king now! Take steps to improve or maintain cash flow. Pay later and get paid quicker.
Win new customers. Make sure you your marketing and sales development budget is working hard for you.
As interest rates rise there will be bargains. Minimise your outgoings. Reduce your overheads.
Hopefully you took advantage of cheap money. However the days of cheap money have passed or are passing. Now is the time to think about paying off debt. The rising cost of debt could pull down countries never mind companies! Make sure your business is not wasting profit on back of your cost of debt. Controlling your costs will help you to be more competitive in tightening marketplace.
World central banks need to act more quickly and more aggressively to calm inflation rates around the world to prevent a global recession and perhaps even global depression from 2023 onwards. This includes increasing interest rates and increasing interest rates in bigger leaps and bounds.
A healthy level of inflation is generally considered to be around 2% per year.
Why 2 percent?
2% inflation per year is considered healthy because it allows for some economic growth while still maintaining stability in the purchasing power of money. It is a rate that is low enough to prevent rapid changes in the cost of goods and services, but high enough to encourage investments and borrowing. However, the specific level of inflation that is considered healthy can vary depending on a country’s economic conditions and goals.
Who thinks this?
The idea that 2% inflation is a healthy level is widely accepted among central banks and economists. This is because it provides a balance between stable prices and economic growth, and has been found to be compatible with low unemployment and stable financial markets in many countries. The Federal Reserve in the United States, the European Central Bank, and the Bank of England, among others, target an inflation rate of around 2%.
How do you reach this target?
Central banks use a variety of tools to reach their inflation target. The most common method is through the manipulation of interest rates. By adjusting interest rates, central banks can influence borrowing costs, which in turn can affect spending and investment decisions. This can then influence the overall level of demand in the economy, which affects prices.
In addition to interest rates, central banks can also use other monetary policy tools, such as buying and selling government securities in the open market, to reach their inflation target.
In some cases, central banks may also use forward guidance, where they provide information about their future plans for interest rates, to influence market expectations and help reach their inflation target.
It’s worth noting that hitting an exact inflation target can be challenging, and central banks may sometimes miss their target due to various economic and financial factors outside of their control.
Is inflation transitory?
Protecting your business from risk of recession and inflation
