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Markets heading for major correction warns Business School researcher

September 29, 2017 Business News No Comments Email Email

World financial markets could be facing a major correction possibly leading to another global financial crisis if United States President Donald Trump fails to deliver on promised economic reforms, warns a leading researcher at the University of Sydney Business School.

Dr Stewart Jones, who is a professor of accounting, says that some fund managers in the US are already preparing for a downturn by reverting to cash while the VIX, or fear index has been climbing recently “over political fears”.

“I think the US market is at some points going to falter,” says Professor Jones. “It’s hard to judge how serious the correction will be. Hopefully it won’t be a GFC 2, but many of the issues that created the first GFC are re-emerging.”

As examples, Professor Jones points to the under regulated over the counter derivatives market which has again risen in value to over 500 trillion US dollars globally and the rapidly expanding trillion dollar student loan market in the US.

He says that the hedge funds and investment banks are now “cutting and dicing up these loans into collateralised loan obligations. They’re being rated by the credit rating agencies and it seems to be a replay of what actually happened during the GFC”.

“With default rates on student loans at around 11% and with a much higher number in a deferral or repayment program it’s looking like an overvalued market,” Professor Jones said.

Financial modelling in the field of credit risk and bankruptcy forecasting, developed by Professor Jones, is also pointing toward a downturn, possibly in the next six to 12 months.

“Since the GFC, there’s been a lot more concern about the measurement of risk, the pricing of risk using more sophisticated models for prediction,” said Professor Jones. “I’m working in more advanced technologies, such as machine learning technologies, which are known to be a lot more accurate in the prediction of risk events.”

He goes on to say that the direction the market takes will be heavily influenced by President Trump’s fortunes.

“The biggest risk to the US economy is probably political risk, in terms of whether President Trump can actually deliver his political agenda, in terms of tax relief, infrastructure spending, healthcare and a plethora of other proposed reforms,” Professor Jones said.

“At this stage I think the market is really hoping for tax reform which will fuel the markets, but I think, that ongoing criticism of President Trump, as we saw recently is extending to some Republican Senators, will also affect the markets.”

“When you look globally with GDP continuing to fall in China, escalating debt in China, rising default rates in the shadow banking sector, the ongoing political turmoil in the US, of course the hangover from Brexit and the Australian economy slowing down. I think these are very considerable risks that we need to take notice of now,” Professor Jones concluded.

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