When is the next financial crisis
Barings chief strategist Dr. Smart: "A recipe for the next financial crisis"
“The next crisis may be years away, but the elements that can cause problems are already there: financial innovations that generate a surge in liquidity; Excesses that are initially invisible until they suddenly become unmistakable; and a slow shift in relative prices that threatens to trigger a cascade of bankruptcies.
Right now the world economy is on the mend, industry looks healthy, trade is picking up, and financial markets are as buoyant as ever. The natural question for savvy investors, however, is whether the good news will last long enough to warrant high multipliers and tight spreads. If a mob storming the U.S. Capitol doesn't shake the markets up, what then?
In 2008, the global financial crisis had its roots in a relatively harmless financial instrument called "securitization," which helped attract money from around the world to fund US mortgages. Technological advances and globalization dampened household incomes, house prices began to fall, and it wasn't long before some of the world's largest banks realized they could no longer bear the burden.
And today? Bloated central bank balance sheets and easy lending have averted a major catastrophe and the recovery is real. But beneath the surface there are tectonic shifts in technology, climate policy, and the post-pandemic that are changing the relative prices of labor, energy, and pretty much anything you can buy online. These are forces that can slowly erode long-standing business models until they suddenly take the markets by surprise.
The number of bankruptcies is now limited and companies have tapped into the credit markets without much difficulty. The pent-up demand should give sales a boost once the lockdowns end, but once shoppers return to their normal habits, it's hard to see if growth will be much higher in the next decade than it was in the last. An aging population means less consumption, a dilapidated infrastructure means higher costs and trade conflicts mean increasing insecurity.
Most crises break out in the unexpected. So the more investors pay attention to these changing patterns and prices, the easier it will be to assess the risks for companies that currently appear to be inundated with liquidity. Successful investing quickly shifts from assessing macroeconomic factors or even predicting government policies to how resilient balance sheets are in a world of volatile prices. Ultimately, the recipe for a crisis is hardly more complicated than that. "
Christopher Smart, Chief Strategist and Head of the Barings Investment Institute
You can find the detailed statement by Christopher Smart in English here.
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