How to Forecast Economic Crises?
Author: Andrey Goilov
Dear Clients and Partners,
The history of market development and the world’s economy shows that when it comes to an economic crisis, it never comes alone: one crisis will definitely be followed by another one, quite different from its predecessor.
Analysts and politicians agree that this is a serious problem threatening all the countries of the world. Financial crises are so harmful because people rely on the work of financial institutions every day. Banks give loans and credit cards so that their clients could afford more and buy things with maximal comfort, while insurance companies protect homes and cars from accidents and stealth – but in crises, all these processes get paralyzed and fall apart like a house of cards, pulling along stock markets.
In this article, I will speculate on the bright economic crises of the past and try to formulate the signs of an economic crisis that might happen in the future.
Why do economic crises happen?
In the market, you constantly see the dollar fall, or oil prices fall, and all this due to economic trouble in certain countries. There are plenty of reasons for another collapse to happen, and some of them seem absolutely absurd.
One frequently raised example is the “tulip-mania” that happened in the Netherlands in 1636. While the price of bulbs kept growing, people spent all their savings on those bulbs. At some point, the price stopped growing and began an aggressive decline, which led to unbelievable losses and a general slow-down of the development of the country’s economy.
The crisis of 2020, also called “the pandemic crisis”, was provoked by the emergence of the new coronavirus disease. Economic activity shrank all over the globe, unemployment sky-rocketed, while the earnings of people fell to record levels.
In the first case, you see an example of the so-called “crowd effect” when private investors become euphoric about something, invest massively in this, and inflate a bubble that later bursts and harms the economy of the whole country. This is a good illustration of the saying: “When a shoe shiner starts buying stocks, it is time to leave the market”.
In the second case, a very random reason made economies all over the world collapse, so that oil futures dropped below zero, which is a record decline in the history of the asset.
How to forecast an economic crisis?
There are several ways of making such forecasts, and some of them are already in our blog.
Time cycles
A collapse of the stock market and impressive growth of the USD happen every decade. After the Dow Jones index collapsed in 2008, a similar crash happened at the beginning of 2020.
Hence, you can calculate the date of the next economic crisis with a minor time lag. Based on this version, we should expect the next major crisis somewhere between 2028 and 2030, while the present growth of the stock market must be just speeding up.
Bottom line
Unfortunately, economic crises have always been around and will happen in the future. Every next such event is likely to be different from the previous one. However, several types of signals warn you of an approaching crisis, so that an experienced investor can leave the stock market and start buying the USD and gold.
One of the easiest ways to predict a crisis in advance is to analyze the bond’s yield: this chart predicted the two latest collapses of the Dow Jones and the stock market. This is an easy but informative and efficient way.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team