Where Will The Next Crisis Come From?
Key Points
- It’s been 10 years since a U.S. financial shock turned into a crisis in the global financial, market and economic system.
- A shock turns into a crisis when the system is unprepared for it. The system is often at its most vulnerable near the end of the global economic cycle when excesses have built up and managing risks may have been neglected.
- The global economic, financial and market system now seems better prepared to manage the shocks of the past were they to repeat in the future. But there are other increased vulnerabilities including: high debt levels, political fragmentation, dependence on international sales, little fiscal or monetary policy ammunition, and the rise of passive investments.
It’s been 10 years since a U.S. financial shock turned into a crisis in the global financial, market and economic system. On September 15, 2008, Lehman Brothers filed for bankruptcy as the shock waves from subprime mortgages rocked the entire financial system, shattering confidence and leading to an economic downfall.
Regularly paying attention to financial news reveals one thing for certain: shocks to the global system happen all the time. Many of these shocks are absorbed by the system without much disruption. Recent examples of shocks might include last year’s escalating geopolitical tensions between the U.S. and North Korea, the U.S. Fed beginning to reverse QE (quantitative easing), or the rapid unwinding of the short-volatility trade that took place earlier this year.
A shock turns into a crisis when the system is unprepared for it. The system is often at its most vulnerable near the end of the global economic cycle when excesses have built up and managing risks may have been neglected. Since we have likely reached the later stages of the cycle, it is now a good time to assess how well the system is prepared for the shocks that lie ahead and where the biggest vulnerabilities may lie.
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