Record low interest rates around the world have created fertile soil for a 30-year recession, similar to what has been experienced in Japan.
That’s according to Learn to Trade’s Jeff Triganza, who told the Nest Egg podcast team the economy isn’t in as strong a position as it appears, courtesy of higher rates of credit default swaps.
He explained, “The credit default swaps were what caused the GFC last time, and the credit default swap market today is twice as big as it was then. So, we've got twice as much risk, if that was the risk.
“Secondly, we've got a really interesting time with interest rates. Interest rates at the moment are at historical lows pretty much in every Western country. And when we have a crisis the first thing the central banks do is cut rates.”
However, as Mr Triganza noted, it’s difficult to do that in the UK where the Bank of England’s official interest rate is 0.50 per cent.
Likewise in the European Union, the rate has been set at 0.0 per cent since March 2016. Canada’s central bank has the official rate set at 1.25 per cent, while the US Federal Bank has its rate at 1.75 per cent.
“Japan's had zero interest rates since 1988. What's going to happen? They can't stimulate the economy by cutting rates. And Japan was the case study,” Mr Triganza said.
“Japan did that [set the cash rate at 0.0 per cent] in 1988. They got to zero, and they've been pretty much in recession ever since then. That's 30 years. It could happen.”
Nevertheless, Mr Triganza said investors shouldn’t react to the current depressed prices by selling.
“Don't sell stuff. Selling stuff is silly. You sell when prices are going up not when prices are coming down,” he said.
Instead, Mr Triganza suggests investors enjoy a martini.
“If you're comfortable with your position today, there's no reason not to be comfortable. Just sit back and watch. Drink a martini. It's [market movements] an entertaining thing to watch,” he continued.
For investors who have seen recessions, and returned to the market following the GFC to find that their investments were about the same price, Mr Triganza said riding out the storm could be the way to react to potential returns to GFC-like conditions.
“Companies that are good companies today will be good companies in 10 years’ time. If they have some sort of a market force that's pushing them forward, there's no reason for them to go bankrupt,” he said.
“We don't have very many companies that are listed in Australia go bankrupt anyway. And if you're only talking at the top end, I'd be very, very surprised if any of the big four banks or BHP went bankrupt in my lifetime.”
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