Question

When do you think we will have another financial crisis and what might cause it? (Write the references used)

Answer 1

It is often stated that there is a major financial crisis every 10 years or so. It’s been a little over a decade since the Lehman Brothers collapse sparked the last global financial crisis.T here has been a variety of reports from prominent analysts lately with predictions as to when the next crisis will hit and what will spark it.

“Strategists at J.P. Morgan Chase recently made a splash with their announcement of a new predictive model that pencils in the next crisis to hit in 2020.”

“Additionally, J.P. Morgan’s Global Head of Macro Quantitative and Derivatives Research, Marko Kolanovic, has highlighted a potential precipitous decline in stocks that could cause what has been termed “the Great Liquidity Crisis.”

He identified the shift away from actively managed investing toward passive investing strategies such as exchange-traded funds, index funds and quantitative-based trading strategies, as well as computerized trading as the potential culprit, which could not only be the catalyst for the next crisis but could also exacerbate the fallout.

According to Joyce Chang and Jan Loeys of J.P. Morgan, “The shift from active to passive asset management, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns.” Passive investing strategies have removed a pool of buyers who can swoop in if valuations tumble, while many of these computerized trading programs are designed to sell automatically when weakness shows, which would only worsen the situation.

Other Major factors which could spark the Recession include:

Students in the U.S. are borrowing at record levels, companies are loading up on debt, and emerging markets also appear to be gorging themselves on cheap debt. Although these pockets of debt are nowhere near the levels of the U.S. housing bubble, according to a report by the New York Times, some are concerned that this accumulation of debt could potentially spur the next crisis, just like it did the last one.

U.S. consumers collectively hold more than $1 trillion in each of mortgage debt, student loan debt and credit card debt.

China-U.S. trade war, the move toward protectionist trade policies in general around the world, and even the possibility of a cyber attack taking down the global financial system could be a possible causes of the next crisis

Too big to fail banks are bigger than ever.10 banks, including J.P. Morgan, Goldman Sachs, and Citigroup now own more than 50 percent of the assets of the top 100 commercial banks.

Analysis of the Yield Curve

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.It is considered to be a predictor of economic recession. Historically, inversions of the yield curve have proceeded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle.

US stock market witnessed the yield curve inversion on below occasions

Date of Inversion	Time to Recession
11 April 1968	19 months
March 9, 1973	7 months
August 18,1978	16 months
September 12,1980	9 months
December 13 ,1988	18 months
Feb 2, 2000	12 months
June 8,2006	17 months

Currently it was witnessed in late 2018.

The timeline between inversion and economic slowdowns are not instantaneous

While it's not possible to predict the exact timing of the next financial crisis, considering the above mentioned analysis we could have a recession somewhere between late 2019 to Mid 2020.

References: Bloomberg.com

CNBC.com

Forbes.com

Economictimes.com