V. Gontis: the World Faces an Explosion of Financial Bubble Unprepared Again

The evolution of financial markets will impact on everyone's life, as all areas of our activities are somehow related with finance and economy. The precise prediction of following events in the coming few months is hardly possible, so our attention has to be on the watch of news flow from the world's financial sectors and our actions has to be as possible timely. What is going on?

Though the attention of world's media during the summer period was primarily devoted to the Greece, potentially the most globally important financial and economic processes originate in China and outspread very far away. China already in 2008 reacting on the global financial crises was one of the first countries, which implemented very wide 586 billion US dollars programme of financial stimulation for the development of the country's infrastructure. Though from the outside view Chines have succeeded to overcome global crises and the growth of GDP was the most rapid in the world, the whole mechanism of financial stimulation experienced serious imperfections exaggerating investment projects with insufficient economic reasoning, overvalued development of housing and building new economic disproportions inside the country. The general estimation of the stimulation program indicates that this contributed to the growth of China after 2008 exceeds up to the 90 percent of whole GDP growth (see article by Bill Powel on Time). Nevertheless, several giant projects have really failed.

The Chinese municipal governments have developed the independent infrastructure programs with total value of used credits up to the 1.7 trillions of US dollars (see Telegraph's article on China subprime credit bubble), the one third of these loans are estimated as bad one. This results that considerable part of municipalities could be considered as a local "Greece-like" problems of China. So extensive use of credits was followed by increased inflation and overvaluation of real estate. Contrary to the many other countries, where prices of real estate after 2008 experienced correction, the bubble in China was blowing up further (see NY Times article on China's housing bubble). As in the case of other financial bubbles the China experiences increased demand of luxury products, in general estimates the market of luxury products here is larger than in US and Europe together (see Businessinsider.com article on luxury demand in China).

These obvious features of financial and economic bubbles in China have to be considered very seriously by other countries, where, including US, bubbles of financial markets are prepared for explosion as many stock indexes are above their historical records. China plays an exceptional economic role as the world's factory impacting considerably on the world prices of commodities and on general demand of products produced in other countries. The response of US and other countries to present problems in China manifested as widespread plunk down of stocks during last three trading days of yesterweek.

Though the media is still looks pretty quiet and broadcasts opinions considering the financial information as ordinary correction of markets, our duty is to warn that, probably, there are the first sounds of global bubble explosion and we have to be ready for the worst (see Telepgrah's article on possible global market crash). One can find more opinions of financial analysts looking at the various web sources of financial information.

More and more compelling facts and economic data about slowing down economy of China are replacing continuing general talks about state of economy in this country. The bubble of stocks is already exploding from the beginning of June and the Shanghai Composite Index lost per 30 percent of its maximum value, there is announcement about decrease of China's exports in July up to the 9 percent in comparison with the same month of year before. Wide announcement in the beginning of yesterweek regarding devaluation of yuan has triggered fluctuations of other currencies as many countries of developing world do not have other alternatives to the devaluation of their currencies as well. This has impacted the markets of the largest word economy in US, where main stock indexes have fallen down about 6 percents during last three trading days and the dollar experienced devaluation in comparison with euro more than 3 percents. Such US response just witnessed very strong dependence on Chinese economic health. The sense of exceptional role of Chinese economy on the world was strengthened by continuing decrease of prices in commodity market and the price of crude oil, which has fallen below the level of 40 dollars.

All these huge global financial fluctuations leave us with very little hope that economic storm will pass. Instead, the understanding that financial markets are prone to become very unstable as a result of statistically prevailing herding nature in the interactions of asset traders [1, 2], supports our confidence that financial markets will continue the collapse and the consequences of this are really impossible to predict with available theories of economics and finance.

We just want to draw more attention to the present evolution of global financial markets, to avoid too late response to the processes making very big impact on the all aspects of our life.

References

• V. Gontis, A. Kononovicius. Consentaneous agent-based and stochastic model of the financial markets. PLoS ONE 9: e102201 (2014). doi: 10.1371/journal.pone.0102201. arXiv: 1403.1574 [q-fin.ST].
• V. Gontis, S. Havlin, A. Kononovicius, B. Podobnik, H.E. Stanley. Stochastic model of financial markets reproducing scaling and memory in volatility return intervals. Physica A 462: 1091-1102 (2016). doi: 10.1016/j.physa.2016.06.143. arXiv: 1507.05203 [q-fin.GN].