Archive for September 2019
- In: wealth management
- Comments Off on Is Another Financial Crisis Imminent?
How a financial crisis comes about? I am gonna use a simple styled example to illustrate the key elements that lead to a financial crisis: easy credit, leverage, contagion, shock amplification.
ABC Shipping has 100 vessels. The market value of a vessel is normalized to 1. (You can imagine that as 1 million dollars.) Because of easy credit (low-interest rates,) the company uses debt financing to the fullest extent. Banks demand a loan-to-value ratio of no more than 60%, so ABC Shipping borrows 60, and has its own capital of 40.
Now imagine, ABC Shipping is doing well operationally speaking, but the industry is Read the rest of this entry »
The Investment Scientist 