The virtual economy heats up, optimistic sentiment rises, the Federal Reserve (Fed) begins to hike rates, and the market beats the drum for relaxed regulations. Isn't this exactly what was happening before a subprime mortgage crisis broke out ten years ago?
Ten years have elapsed, and analysts are worrying about whether another crisis is in the works in Wall Street and whether the world can handle it better.
GREED OF WALL STREET RETURNS
"Greed is a powerful force. We are trying not to forget that," Andrew Sheets, a credit strategist at Morgan Stanley, wrote in a recent note, comparing the current market situation to the early days of 2007 and warning of a resurgence of greed.
Since Donald Trump won the presidential election on Nov. 8, the U.S. stock market has been hitting a record high, with the S&P 500 rising nearly 9.3 percent.
Wall Street analysts believe that the current behavior of U.S. stocks, instead of mirroring the real economy, is a "wager" on the Trump administration's new moves like tax cuts, spending hikes and relaxed regulations.
Yet, U.S. growth was merely 1.6 percent last year, lower than 2.6 percent in the previous year. With the state of the real economy unclear and the virtual one that hot, the asset bubbles could burst anytime.
This scenario looks quite familiar, as Sheets warned "how often do greedy markets care about valuations?"
Meanwhile, the Fed raised interest rates in December for just the second time in a decade, with three hikes more expected this year. The Fed's continuous rate hikes might trigger a mortgage crisis again as it did before.
The Fed's rate hikes will increase the cost of funds and restrain investment. In the past, financial crises were likely to occur when the Fed kept raising interest rates, for example, the outbreak of the Asian financial crisis in 1997 and the emergence of the mortgage crisis in 2008.
In addition, Trump's possible move to relax regulations will also bring some new risks.
Blind optimism, the Fed's continuous rate hikes and other improper policies are likely to bring about a new round of "perfect storms." Even the most optimistic analysts in Wall Street have to admit that a mid- and long-term risk is building up rapidly, even if no systematically financial crisis occurs in the United States in the short term.