Next financial crisis is coming soon
JP Morgan warns the next financial crisis will hit in 2020.
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JP Morgan warns next financial crisis is coming soon
By Imelda Cotton - September 15, 2018
JP Morgan financial crisis 2020
JP Morgan warns the next financial crisis will hit in 2020.
They say history never repeats but on the 10th anniversary of the 2008 Lehman Brothers collapse which froze economies and plunged the world into the worst recession on record, Wall Street’s largest investment bank has predicted the onset of a round two financial crisis within the next 24 months.
Strategists at JP Morgan Chase & Co have created a predictive model aimed at gauging the timing and severity of the next slump and they’ve circled 2020 as the year it will likely strike.
The model calculates outcomes based on length of the economic expansion, the potential duration of the next recession, the degree of leverage, asset-price valuations and the level of deregulation and financial innovation before the crisis.
Assuming an average-length recession, the model came up with a set of “peak-to-trough” performance estimates for different asset classes as part of a detailed 143-page report released this week.
The estimates returned a post-crisis economy where US stocks have declined by around 20%, US corporate bond yield premiums sit at around 1.15 percentage points, energy prices drop by 35% and base metals by 29%.
The report also predicted a 48% decline in emerging market stocks and a 14.4% decline in emerging currencies.
“The forces that have transformed markets in the last decade, namely the rise of computerised trading and passive investing, are setting up conditions for potentially violent moves once the current bull market ends,” the report stated.
Good and bad news
The bad news is that while the exact timing of the next economic downturn is uncertain, the event itself can’t be avoided.
The good news according to JP Morgan, is that the coming slump is expected to be milder than the last, with its severity determined by the speed in which banks can hike interest rates and reverse bond purchases if markets fall by 40% or more.
“If central banks can head off the worst of a crisis by providing a floor for asset prices [in a crisis], then the status quo will probably be maintained,” analyst Marko Kolanovic said in an interview with CNBC earlier this month.
“If they don’t manage to, then you’re spiralling into depression, social unrest and a lot more disruptive changes that can negatively affect returns for a very long time.”
Mr Kolanovic previously concluded that a shift from actively-managed investing – through the rise of index funds, exchange-traded funds and quantitative-based trading strategies – to passive investing had escalated the danger of market disruptions.
“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,” he said.