The world’s financial markets are heading for a “hyper-crash” so great that all previous crashes will “appear as minor stumbling blocks,” warns new research.
The near future of the global economy looks “extremely bleak,” according to state of the art statistical analysis of the influential S&P 500 stock market index by nuclear scientists.
Their analysis suggests the “nervousness of the world market is growing all the time” since the collapse of Lehman Brothers investment bank in 2008 – and could lead to a massive global financial meltdown around the year 2025.
Scientists from the Institute of Nuclear Physics of the Polish Academy of Sciences in Cracow, who conducted the analysis, say that within a “dozen or so” years we can expect a financial meltdown “such as never before”.
They said Black Monday, the bursting of the dot-com bubble and the bankruptcy of Lehman Brothers shook the global economy.
But they warned that soon we may have to deal with such a “gigantic collapse” of financial markets that all previous crashes will appear as “minor stumbling blocks” in comparison.
The “catastrophic” vision emerges from “multi-fractal” analysis of financial markets published in the journal Complexity.
Professor Stanislaw Drozdz, of Cracow University of Technology, said: “The data is, unfortunately, quite unambiguous.
“It seems that from the mid-2020s, a global financial crash of a previously unprecedented scale is highly probable. This time the change will be qualitative, indeed radical.”
The researchers looked at various economic measures, including Standard & Poor’s 500 index – the largest global stock market index including the largest 500 firms, largely of a worldwide nature – from January 1950 to December 2016.
They said their main goal was not to make catastrophic forecasts, but to credibly present issues related to the occurrence of “multifractal effects” – those in which in order to see self-similarity, different fragments of the structure under investigation have to be increased at different rates – in the prices or stock market indices.
The scientists’ attention was especially drawn to a graph showing changes in the ‘Hurst exponent’ calculated for the S&P 500.
The Hurst exponent can assume values from zero to one and reflects the degree of susceptibility of a system to a change in trend.
Stable, mature markets are recognised as being those whose Hurst exponent is equal to 0.5 or shows only slight deviations.
The Hurst graph for the S&P 500 does actually start at 0.5. On October 19, 1987, however, there was a crash – the infamous Black Monday.
The exponent then slightly decreased, but for more than a decade it remained relatively stable again.
At the turn of the century there was a clear fall, and by March 2000, the dot-com bubble had burst.
Just as before, the Hurst exponent again stabilised, but for a shorter period.
Already at the end of the first decade, it suddenly began to grow rapidly, only to fall after the bankruptcy of Lehman Brothers in September 2008.
From that moment, the Hurst exponent not only did not return to the value of 0.5, but in the last decade it has “quite clearly and systematically” fallen below the particularly worrying value of 0.4.
Prof Drozdz said: “What is also striking in the changes in the Hurst exponent for the S&P 500 is the shortening time intervals between consecutive crashes and the fact that after each collapse the indicator never returns to its original level.
“We have a clear signal here that the nervousness of the world market is growing all the time, for decades, regardless of changing people, business entities or technology.”
He said the dependence corresponds with another detected by him and his colleagues in 2003.
Prof Drozdz said the earlier analysis suggests that each crash is preceded by smaller swings – “quasi-mini-crashes” – which have been called precursors.
He said: “The thing is that analogous self-similar dependence can also work on larger time scales.
“In which case, all previous crashes would only be precursors of a much larger and more dangerous event.
“When we come across a process with similar dynamics in physics, we talk about phase transition of the second type, such as the appearance or disappearance of magnetic properties in magnetic material around the Curie temperature.”
Prof Drozdz said the question concerning the credibility of such a pessimistic forecast remains open.
If financial markets do not change qualitatively in the coming years, he said the worst-case scenario of the development of events has the chance of becoming a reality.
Be he says people must “bear in mind” the significant difference between the worlds of mathematics or physics and the world of finance.
Prof Drozdz added: “The problem is that we do not know what or how something would have to affect the global market to prevent the impending collapse.
“One remedy may be, for example, the emerging markets of cryptocurrencies, but will they really become one? Nobody knows.
“It is not even certain whether, knowing about the changes that are necessary, it would be possible to introduce them in just a few years – and it does not look like we have a longer period at our disposal.
“The future of the world economy from the mid-2020s thus appears very gloomy.”
By Stephen Beech
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