Another $20 trillion threat on the horizon

8 de jan. de 2020

In previous reviews, we have repeatedly talked about the future global crisis. The economy is developing cyclically and sooner or later will have to pay for a period of growth and prosperity. 2019 clearly showed that the situation in the world economy is rapidly deteriorating and if nothing happens, then it is only a matter of time before the decline comes to replace economic growth.

We have already said that trade wars, escalation of the conflict between the USA and Iran, presidential elections in the USA, all kinds of force majeure and flash crashes, the collapse of price bubbles in the stock market, corporate lending and real estate, derivatives market, defaults of Chinese corporations, lack of liquidity in financial markets, etc can accelerate existing negative trends and provoke a global crisis.

Today we’ll talk about another problem, the price of which, according to various estimates, is up to $ 20 trillion. We are talking about the financial risks associated with climate change.

Current events in Australia show that the scale of natural disasters is growing rapidly, as well as their consequences. Moreover, we are talking not only about physical consequences (destruction), but also financial ones (for example, payment of premiums by insurance companies, loss of assets, etc.).

Here is a trivial example: real estate on the coast. The fear of flooding can lead to the fact that people will begin to massively get rid of such real estate, which could trigger a crisis in the market as a whole. And this is just one aspect. Insurance companies, for example, may refuse to insure real estate on the coast or radically increase insurance rates. Banks may stop issuing a mortgage, investors will redirect their funds from real estate investments on the coast somewhere else and so on. To understand the extent of the problem, here are the results of a recent Center for American Progress (CAP) study. If the sea level rises just a couple of meters, for the US real estate market it will cost about $ 900 billion.

And this is just one aspect of climate change: fires, hurricanes, droughts.

The energy industry tied to fossil fuels (coal, oil, gas) could lose from $1 to $ 4 trillion. (the actual fall in natural gas prices last year from $5 to $2 is a clear confirmation of this). Global warming will provoke a sharp decline in demand for energy assets, which in turn can trigger a chain reaction across the industry with the potential damage of up to $20 trillion.

And then a chain reaction will start - insurance companies, investment companies, banks, other financial intermediaries directly or indirectly associated with the energy sector will suffer. Trillion losses will naturally not go unnoticed and will likely provoke global consequences.

Such a scenario, of course, is inherently very long-term. But natural force majeure is very dynamic in terms of appearance and course. Considering how serious their consequences have become recently, they may well be one of the factors that will trigger a chain reaction, which will ultimately provoke a new world crisis.

The period of unrestrained economic growth, based on monetary stimulation, provoked the appearance of price bubbles in a number of markets, we suggest not to stand aside, watching how everything collapses, but to make money on it.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual big issuers (Apple, Microsoft, Alphabet, Oracle, etc.).