Well-Known Investors Are Warning of a Financial Crisis
Even financial mavens are now warning of a looming financial crisis.
Just recently, at the European Council on Foreign Relations, well-known investor George Soros said that, “We may be heading for another major financial crisis.” (Source: “George Soros is worried about another financial crisis,” CNN, May 29, 2018.)
Soros gave four reasons for his belief: soaring anti- European Union (EU) sentiment, the Iran deal, the rising dollar, and investors ditching the emerging markets.
Nobel Prize-winning economist Paul Krugman has also said a financial crisis could be in the air. Note that he correctly predicted the financial crisis of 2008-2009.
Krugman believes a crisis could be ahead because of emerging markets—that a situation like the Asian financial crisis of 1997–1998 could be at play.
“Are we seeing the start of another global financial crisis? Probably not — but I’ve been saying that there was no hint of such a crisis on the horizon, and I can’t say that anymore,” he said. “Something slightly scary this way comes.” (Source: “Paul Krugman Joins Chorus of Doomsayers on Emerging-Market ‘Crisis’,” Bloomberg, May 23, 2018.)
There are several other well-known figures who have made similar statements, including Mark Mobius, fund manager and founder of Mobius Capital Partners LLP, and Carmen Reinhart, Professor of the International Financial System at Harvard University.
So What?
You see, this time around could be the mother of all financial crises. Because there’s a lot more at stake now than in the past.
For example, there’s certainly more debt in the financial system. According to the International Monetary Fund (IMF), in 2016, the global debt stood at $164.0 trillion—225% of the global gross domestic product. (Source: “Global debt is at historic highs and governments should start cutting levels now, the IMF says,” CNBC, April 18, 2018.)
In the case of a financial crisis, the banking sector comes under fire. But this time around, banks have much more leverage than they did before.
According to the Office of the Comptroller of the Currency, at the end of 2017, the top 25 U.S. banks had derivatives with a notional worth of $172.0 trillion and assets amounting to just $15.6 trillion. That’s $11.00 of derivatives for every $1.00 of assets. (Source: “Quarterly Report on Bank Trading and Derivatives Activities, Fourth Quarter 2017,” Office of the Comptroller of the Currency, last accessed May 30, 2018.)
On the global level, the derivatives amount is much bigger. And if a financial crisis becomes reality, debt and derivatives could add more fuel to the fire.
How to Get Ready for the Next Financial Crisis
All of what has been said so far shouldn’t be surprising for long-term readers of the Lombardi Letter. They have been warned all about this before.
In case there’s a financial crisis, it’s important that investors are ready for it. Losses across assets could mount higher very quickly, meaning a lot of wealth could be wiped out. So as the concerns of a crisis get louder, capital preservation could be key.
Remember: at the peak of a crisis, usually the greatest opportunities emerge.