A Possible Financial Disruption in the Next Two Years
[Note: much of this column was recently published in the Sarasota Herald-Tribune]
I am not a financial adviser nor an economist. I do not offer investment advice.
I am instead very happy to be a futurist whose value is to forecast the future accurately up to five years out and directionally 10 to 15 years out. I look at big trends and then try to see data points that others don’t and to connect them to suggest where we all might be going in the years ahead.
As to the title of this column, I use the word “disruption” intentionally. “Correction” would be a word that suggests price drops in markets. What I see is more than that. “Collapse” sounds like a catastrophic event and, while there is that possibility, I am not a fear monger at all. My highest value is to suggest and point to what lies ahead so we can prepare and adapt as needed.
So back to connecting the data point dots as a futurist. Here are some data points that, taken together, suggest to me a significantly greater than 50 percent chance of a major global financial disruption in the next two years:
- The total amount of personal debt — credit cards, installment loans, student debt and mortgage debt — is now greater in the U.S. than it was in 2007.
- The amount of student debt in the U.S. has doubled since 2007. Recently, the percent of delinquent student loan debt has been increasing.
- There is evidence of problems in the sub-prime auto-loan market. (Anyone remember what began the 2007-2008 collapse? Yes, sub-prime loans for real estate.)
- Evidence suggests that a significant amount of the trillions of dollars the Federal Reserve has put into the economy did not “prime the pump” as planned. Instead, much of it stayed in the financial sector to buy back shares and take companies private.
- The Federal Reserve has verbally committed to raising interest rates from their historical low.
- There are fewer actual listings on U.S. financial exchanges than there were before the Great Recession and, of course, the total value of the markets is significantly higher. So, what we have is a more concentrated equity marketplace.
- The federal debt has more than doubled to $20 trillion since 2007 and the debt ceiling was just increased again.
- Numerous states, including my former home state of Illinois, are technically bankrupt, buried under ever-increasing amounts of debt and promised pensions. Illinois alone has more than $100 billion of unsecured liabilities.
- China, when it’s growth rate declined to mid-single digits, initiated a massive amount of corporate debt to fuel increased growth. There is evidence — though financial reporting in China is relatively opaque — that this debt is underperforming.
- The Chinese, who have always had one of the highest savings rates in the world and have tended toward cash transactions, are increasingly spending and using credit for purchases, both consumer and real estate.
- The Eurozone, which followed our Fed and flushed Euros into its banking system, now has massive debt and weak growth. In addition, Brexit and recent independence votes and parties are threatening its cohesiveness.
- The market is largely emotion-based. Given all the significant uncertainties in the world today — nuclear war, independence movements, climate change, massive cyber attacks, non-functioning democracies, growing wealth inequality, the appointment of a new Fed chair, massive social unrest, President Trump’s penchant for sewing chaos — there is a very good probability that an unpleasant event could trigger a massive correction in some or most equity markets.
- The ever-increasing connectedness of the global economy means that bad news or events could rapidly spread globally.
Debt is the four-letter word of the global financial system. Much of the global economy is based primarily on debt. Trillions of dollars are sloshing around the world seeking returns — which has been a source of stock-market records — can move very quickly. So a big disruption somewhere can quickly spread globally.
As I look at the above list, I struggle to see what macro positive forces could offset it. Yes, recent U.S. GDP growth of close to 3% annually is a good sign. However, I see way too much fragility in the global economy and the current geo-political situation for this to mean much long term.
Now, please remember I am suggesting a real possibility of a significant financial disruption within the next 30 months. It could start next week or in 2019. It could start with a couple of small “market corrections” that then cascade ever downward. It could start with a series of massive debt defaults.
In a larger, longer more historical perspective, humanity may be entering the transition from a largely capitalist society to a post-capitalist society. This transition will take decades. There were centuries of feudalism followed by centuries of capitalism. Now some aspects of capitalism seem outdated. We may well be at the very beginning of the move to a post-capitalist society and economy in the next few decades, a significant historical transition.
Gross domestic product, as the measurement of physical goods and services, is less relevant in economies that are increasingly digital. Market scarcity, a major building block of the capitalist market economy, does not exist in the digital landscape (which has led to the flourishing “information wants to be free” thinking in this post-digital economy).
And please don’t assume that I do not believe capitalism is the best form of an open economy. It is the best form. It just might be in its historical end game.
A possible indicator of this is that there were two massive recessions and market collapses less than 10 years apart — 1999 to 2000 and 2008 to 2009 — something unprecedented in the last 100 years. If I am correct in my forecast of a coming financial disruption, then there will have been three significant economic collapses or corrections in a span of 20 years. That simply has to signify some larger historical transition.
But that is for another column.
For now, just stand forewarned and pay attention, because things tend to go down faster than they go up.