‘The next crisis is not likely to be another Lehman, but another Japan — a widespread zombification of global economies to avoid the pain of a large repricing of sovereign bonds, which leads to massive tax hikes to pay the rising interests, economic recession, and unemployment.’
That’s how Daniel Lacalle, chief economist and investment officer at Tressis Gestion, sees the next market mess unfolding.
“In the past 50 years, we have seen more than eight global crises and many more local ones, so the likelihood of another one is quite high,” he wrote in a recent piece. “Not just because of the years passed since the 2007 crisis, but because the factors that typically lead to a global crisis are all lining up.”
Those factors include complacency, excessive risk-taking and the belief that THIS time, it’s different.
“The 2007–2008 crisis did not start because of Lehman,” he wrote. “It was just a symptom of a much wider problem that had started to cause small bursts months before — excess leverage to a growth cycle that fails to materialize as the consensus expected.”
Lacalle explained that this time around, contagion is much more difficult in light of the lessons learned from the Lehman debacle. Stronger mechanisms are in place to avoid a domino effect in the banking system. Instead of a sudden bursting of the bubble, he says “global stagnation” and a steady decline in asset prices, which is already underway, could ultimately lead to a full-blown crisis.
“When will it happen? We do not know, but if the warning signs of 2018 are not taken seriously, it will likely occur earlier than expected,” he wrote in his post. “However, the governments and central banks will not blame themselves; they will present themselves — again — as the solution.”
Certainly no sign of the unraveling in Wednesday’s session, which saw the Dow Jones Industrial Average DJIA, +2.13% explode for a gain of 545 points to close at 26,180. The Nasdaq Composite COMP, +2.64% fared even better with a 2.6% rally to finish trading at 7,571.