By Jack Peat, Editor of The London Economic
Boom and bust seems like a primitive economic state, but few would argue today that the harsh cyclical nature of the economy has seen its day. If anything, they’ve become more severe.
Soviet economist Nikolai Kondratiev theorised in the early 20th century that the economy works in waves that range from forty to sixty years, with high sectoral growth leading to intervals of relatively slow growth. In 1939 Joseph Schumpeter suggested naming these cycles “Kondratieff waves” in his honour and although the theory, unlike the short-term business cycle, is not accepted by current mainstream economics, it does offer an interesting hypothesis.
Since the Great Depression in the ‘30s there were two recessions (two quarters of negative growth) in ’56 and ’61 as well as sustained recessions in the 70s caused by the ’73 oil crisis. Thatcher’s monetarist government policies caused a long recession in the early ‘80s and the US savings and loan crisis caused recessions in the early ‘90s. The recession that proceeded in the 21st century needs no introduction. It was the crisis and the first to warrant ‘great’ as a measure of its magnitude.
These peaks and troughs somewhat confirm Kondratiev’s theory in terms of their consistent wave-like nature, although they’ve occurred with more frequency than the Russian predicted. Brian Domitrovic commented in Forbes that we’re not experiencing waves at all but simply constant underperformance. “The reality just might be that in an epoch of history when the government thinks it can run the economy, extended underperformance will be the rule, and the continued march of prosperity the exception,” he said.
But with all that perspective on our side surely we can’t succumb to yet another crisis? The days when Wall Street’s optimistic forecasts ruled the market are over, right? The IMF, Fed, Bank of England and other governing bodies have surely learned that debt is dangerous and thus prompted a new era of risk aversion in the financial markets. With bankers’ bonuses on the rise again, house prices rocketing and the financial services industry back to its old tricks I think we can say one thing for sure; We rarely learn from our mistakes.
With that in mind, here’s five of the next potential crashes.
Social Media Bust
Social media could well be the next Dot-com bubble of the late ‘90s and early 2000s. The surge in technology shares was driven by new technology and a constant stream of new products that lured opportunistic investors to incessantly invest. Hype, overvalued IPOs and scores of start-ups offering gimmicky services allowed a market bubble to be created that burst in spectacular fashion with the Nasdaq Composite losing 78 per cent of its value.
The social media bubble is showcasing many of the early characteristics associated with the Dot-com bubble. The market has its roots in a relatively few tech companies – Google, YouTube, Twitter, Facebook etc – but has since become crowded with firms claiming to be ‘the next big thing’. Zynga, for example, launched an IPO at $7 billion despite experiencing rapidly decelerating growth and employing a few accountancy tricks to keep the books sweet. Their valuation is typically based on hype and hope rather than solid economics, which means there’s a load of money been thrown at aspiring entrepreneurs who don’t have a clue how to build a company.
Facebook, Twitter and the stalwarts are here to stay, just as Cisco was when its stock declined 86% on the Dot-com bubble and Amazon whose stock went from 107 to 7 dollars per share. But the market is becoming populated by firms not designed to last.
London Housing Market
House prices in the UK have risen at dangerous levels so far this year, none more so than in London, where prices are surging at almost 20 per cent a year. The National Housing Federation has warned that house buyers will need to earn more than £100,000 to afford a typical 80 per cent mortgage as the cost of houses in the capital accelerate at five times the pace seen in the north-east of England. A typical property will now set you back £514,000 in London, and with more people coming to work in the capital and supply trailing demand this price is likely to continue rising.
Earlier this year Sir Jon Cunliffe of the Bank of England said Britain’s booming housing market could be heading for a crash, saying it is dangerous to ignore the momentum apparent across the country, but particularly in London. The announcement came in May when it emerged that one in 15 London houses are now selling for £1 million or more.
Cunliffe added that Britain had a history of booms turning to bust. “This is a movie that has been seen more than once in the UK”, he said.
The Premier League
Initially proposed by BBC Sports Editor Dan Road (although I swear I jotted this idea down weeks ago) there is the potential that an OfCom investigation could burst the Premier League bubble. This summer a record £835 million was spent on football players which was backed primarily by TV revenue, but if OfCom finds cause for the Premier League to reconsider the number of rights packages it sells, this lucrative industry could quickly crumble.
BT Sport has followed in the footsteps of ITV Digital, Setanta and ESPN in trying to shake Murdoch’s BskyB off a perch that it has occupied since the inauguration of the Premier League. But they’re not messing around. Hot after the broadband market and using football as an inroad BT has invested billions of pounds in football. The Premier League rights auction in 2012 saw a 71 per cent increase in the price of television rights and BT Sport has subsequently penned a £897 million deal for Champions League rights.
Football clubs have gone out on a spending spree on the back of these lucrative deals bringing in players for tens of millions of pounds and then filling their pockets with hundreds of thousands a week. But the consumer is the one left to suffer from the deal. As Dan Road notes “there are signs that at a time when many families are struggling to make ends meet, the cost of watching football live on TV is becoming prohibitive for some”. If the Ofcom decide to shake-up TV rights or, worse of all, the Premier League becomes too expensive, the league could see a considerable knock-on effect from a revenue stream that’s more influential than Abramovich and Al Mubarak put together.
An internet security disaster is widely touted to be the next big thing with networked computers creating trillions of dollars in new economic power. The Heartbleed internet security bug first brought the potential of an ‘internet crash’ to light with a spreadability of ten out of ten and an impact of five out of ten, but since then a new bug has been found with a spreadability of ten out of ten and an impact of ten out of ten.
Shellshock has really caught the attention of IT experts. Larry Seltzer told ZD Net: “In retrospect, the grave concern over Heartbleed seems misplaced. As information disclosure bugs go it was a really bad one, but it was only an information disclosure bug and a difficult one to exploit. The sky’s the limit on attacks with Shellshock.”
There are several attacks associated with Shellshock from malware droppers to reverse shells, backdoors, data exfiltration and DDos, but what Heartbleed and Shellshock have shown is that the architecture of the internet is more vulnerable than we once thought. Although the internet was created with servers and mechanisms that would be resilient to such problems, the applications built on top of the internet don’t share those characteristics.
According to the stock market, the UK economy is in a historic boom. The FTSE climbed to new highs earlier this year which is incredible given that the UK economy as a whole has yet to recover the lost ground lost since the 2008 crash. It shows that the recovery is being built on sand rather than stone, with policy makers happy to ignore the apparent instability so long as the market clouds its existence.
But it could all go wrong if the inherent weaknesses of the economy are exposed. Thanks to Thatcher the UK has no backbone and if we can inflate a bubble on hype we can most certainly burst one based on uncertainty. What’s more the Scottish referendum has highlighted the political instability in the country. If UKIP got its way and we voted to leave the EU then things could really start to take a tumble. When business vacates the UK the market will soon realise growth has been built on false economic props.
With Cameron edging towards war in Syria and the country disillusioned by the political order, the UK could be a crash waiting to happen.