The year 2020 has presented many an economy, country, and government along with numerous businesses and subsequently, investors, with numerous challenges as the markets have seen highs and exceptional lows, with no idea whether markets have reached their bottom, or whether it is still looming ahead.
As the strongest economy in the world, the United States has already been heaving under the impact of the Covid-19 pandemic, and these standards are about to be tightened even further.
There is a general wide acceptance and presumption regarding American exceptionalism and currencies have always set the equilibrium between two forces, namely domestic economic fundamentals and that of foreign perceptions regarding the strength or weakness of a nation says Louis Schoeman from investment group – SA Shares
There is a slow, yet steady, shift in balance, and the results from this may very well be a substantial crash in the US Dollar.
Reasons why a financial crash may be looming
The seeds of concern on a global front, as all eyes turn to the United States, have been sown by a substantial shortfall in domestic U.S savings which have been quite apparent even before the emergence and spread of Covid-19 around the globe.
During the first quarter of 2020, Net National Savings fell to around 1.4% of national income. This includes depreciation-adjusted savings of households along with that of businesses and the government sector.
It fell to the lowest reading since 2011 during this time in addition to one-fifth the average of 7% between 1960 and 2005.
This resulted in the United States taking great advantage of the role of the US Dollar as the primary reserve currency in the world due to a great lack in domestic saving in an attempt to increase investment and growth.
However, with this move, it has greatly drawn on surplus savings from abroad, which comes at a price. For the United States to attract foreign capital, it has run a deficit in its current account, which has been the broadest measure of trade, including investment, from 1982.
Covid-19 has left a trail of disparities and destruction in its path, and has triggered economic crisis around the world, which has stretched the tension between the United States’ saving and the current-account to an inevitable breaking point.
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More reasons why markets are set to crash in the fourth quarter of 2020
There are numerous events that may lead to an inevitable financial market crash in the final quarter of the year, these include:
- A rapid increase of Covid-19 infections as economies open to allow for normal operations considering that scientists are still learning about the SARS-CoV-2 virus which causes Covid-19 and how it is spread.
- Covid-19 and failing vaccines should the hype around it fail to meet expectations thereof.
- Loan delinquencies could soar due to the lack of agreement on Capitol Hill associated with a round of stimulus funding.
- United States election uncertainties resulting from polling numbers which are set to tighten with following upcoming debates between the Democratic Party challenger, Joe Biden, and President Donald Trump.
- The trade war between the US and China re-escalating – which plays upon previously buried issues and the potential of these resurfacing after the deal signed between the United States and China in mid-January.
- Emotions from investors which have been a result from the economic and financial crisis faced during the greater part of 2020, and
- History which could repeat itself considering each of the past eight bear markets, which can be dated back to 1960 and how there were 13 stock market corrections that have resulted from this.
Why should you trade before the financial crash?
Although a lot of traders and investors may panic with impending news and signs of a financial crash, there are however numerous opportunities for traders who have been biding their time in preparation for such an event.
Most investors and traders who hold dollar-denominated assets may want to sell them at any costs and result in those affected to demand any other assets that are not denominated in dollars.
Inadvertently, with a financial crash, the value of the dollar is set to decrease rapidly and substantially, which will give other currencies, and assets which are not denominated in dollars a clear rise in value.
However strong other currencies would become, it is imperative to consider that a dollar collapse will result in global economic turmoil as investors rush towards other currencies such as the Euro, and other assets such as gold and commodities.
Final Thoughts
Investors and traders alike are advised to ensure that they can adequately accommodate conditions in upcoming months, including a potential financial crash, by looking at some of the following:
- Keeping informed on the global economy
- By keeping a portfolio that is well-diversified
- Ensuring that they have some liquid assets which they can easily move
- Investing in foreign mutual stocks and bond funds, and
- By buying gold and precious metals.
