Prepare Now for the 2020 Crisis

Written by Swiss America

Financial Crisis Image Courtesy of Marco VerchThe Crisis of 2020 -Roach/Project Syndicate
"It doesn't take much to spark corrections in vulnerable economies and markets, and big shocks to highly vulnerable systems are a recipe for crisis...Predicting the next crisis - financial or economic - is a fool's game. Yes, every crisis has its hero who correctly warned of what was about to come...But the record of modern forecasting contains a note of caution: those who correctly predict a crisis rarely get it right again. The source of vulnerability that I worry about the most is the overextended state of central-bank balance sheets...which is essentially a failed policy experiment...

Steeped in denial, central banks are once again upping the ante on balance-sheet expansion as a means to stimulate flagging economic recoveries....According to the widely cited metrics of Nobel laureate economist Robert Shiller, equity prices relative to cyclically adjusted long-term earnings currently are 53% above their post-1950 average and 21% above the post-crisis average since March 2009. Barring a major reacceleration of economic and earnings growth or a new round of Fed balance-sheet expansion, further sharp increases in US equity markets are unlikely....The problem also lies in weak real economies that are far too close to their stall speed. The International Monetary Fund recently lowered its estimate for world GDP growth in 2019 to 3%....In such a vulnerable world, it would not take much to spark the crisis of 2020...Three 'Ps' are at the top of my list of concerns: protectionism, populism, and political dysfunction....The diagnosis of vulnerability needs to be taken seriously, especially because it can be validated from three perspectives - real economies, financial asset prices, and misguided monetary policy. Throw a shock into that mix and the crisis of 2020 will quickly be at hand."