Do you remember where you were on September 15, 2008, the day that Lehman failed unleashing the unintended consequences of a global financial crisis that began to foment and then snowball?
Consequential events may not always appear to be so, and as Lehman Brothers was allowed to go under most of us may not have initially realized the economic significance!
And once we did understand, our propensity towards short memories often leads to the scenario where lessons that need to be learned, are not! Thus the door for past events to potentially occur again will typically remain open!
This sentiment was expressed well by both Jean-Baptiste Alphonse Karr, ‘The More Things Change, The More They Remain The Same‘ and George Santayana, ‘Those who do not learn history are doomed to repeat it‘!
Ten years after the bankruptcy filing of Lehman Brothers, a time when financial, emotional and corporate dislocation ran roughshod over the masses in countries around the world, has the environment changed to the point that another financial crisis of that magnitude occurring is completely out of the question?
With the epicenter of the prior crisis initially the real estate market, lax underwriting of mortgages, misrepresentation and sale of exotic investment vehicles along with over-the-top greed among many, who can forget the subsequent pain of lost businesses, lost jobs, lost homes, lost fortunes, lost hope and a wide variety of other things ‘lost’ in a list that would be too long to mention them all.
And yet since the widespread pain felt by so many not that many years ago real estate in most locations have recovered, some areas such as New York City surging to record high values. The stock market has soared to new highs, the economy seems to be on a stable footing, unemployment is very low, interest rates remain at subdued levels, inflation is under control, etc. And so, all is seemingly once again well with the state of things.
But are there warning signs, signs that will typically go unnoticed, until at some point the s–t once again hits the fan and the ‘experts’ wonder how they were missed?
Are There Any Early Warning Signs That Are Be Signaling Global Financial Trouble May Be On The Horizon Or Indicators That It’s Not?
With hindsight, we can examine the issues that brought about Lehman’s failure and the financial crisis that affected so many around the world. Today those warning signs, after the fact, are crystal clear! These are some issues present today that could potentially be the proverbial canary in the coal mine! And while many great economic factors are present, some other issues make us think that it potentially is deja vu all over again…
Of course, warning signs do not equate with certainty that an economic event will occur, but it’s typically wiser to be informed and potentially proactive than it is to be completely reactive.
1. Concerning: Good times tend to breed complacency or, in other words, humans have very short memories! Indicators like the Fear Index or Vix currently trading at levels very close to pre-2008 would seem to indicate that despite all of the global and domestic goings-on including trade disputes, the masses are relatively comfortable with the status quo.
2. Positive and Negative: Banks are stronger today than they were pre-financial crisis due in part to ‘…a reappraisal of country risk, the recognition that foreign business was often less profitable than domestic business, national policies promoting domestic lending, and new regulations on capital and liquidity…’ (McKinsey) Some banks, however, due to their ‘importance’ have been labeled Too Big To Fail (TBTF) and are larger today than they were pre-crisis. The granddaddy of potential global systemic risk, JPMorgan Chase, has assets of more than $2.5 trillion today nearly double its size from 2006. Wells Fargo and its almost daily announcement of one scandal or another is approximately 300% larger today than it was at the end of 2006.
3. Unknown: Could trade tensions, tariffs imposed or not imposed, political rhetoric, domestic politics, emerging markets angst or some other example of potential unintended consequences move beyond a mere annoyance into the realm of an economic crisis?
4. Unknown: If another crisis begins to unfold, will the Federal Reserve be in a position to once again act in the role of the global lender of last resort?
5. Good, Bad and Unknown: While households post-crisis deleveraged their balance sheets, reflecting back to point #1 they have once again let the good times roll with household debt in the second quarter reaching a level of $13.29 trillion compared to $12.68 trillion in the third quarter of 2008. Student loan debt of $1.5 trillion is nearly triple the level from 2008 with the staggering statistic of more than 1 million borrowers a year going into default and fully 40% of borrowers predicted to default by 2023 (CNBC).
6. Concerning: Someday a recession will come and with it lower revenues to both the federal government, governments down the line and corporations. Will they be in a position to service this debt that, in the case of the federal government, has surged in 10-years from ‘77.4 percent of GDP (or 105.7 percent if you use the broad measure) from 40.4 percent 10 years ago (69.6 percent with the broad measure)…’ And what about global debt? ‘…Global debt as a percentage of the world’s GDP was 286 percent when we were watching pictures of Lehman employees carrying out their boxes. Today it’s 318 percent…’ (Wealth Management)
7. Good: The economy is firing at a plus-4% GDP, unemployment is sub-4% and consumer confidence has surged to ‘…a 133.4 reading in the Consumer Confidence Index® from The Conference Board. July’s reading was 127.9. The Expectations reading of the Index, which gauges how consumers feel about their business, employment and income prospects six months out, improved, as well, to 107.6, while the Present Situation reading, which gauges how consumers feel about conditions currently, rose to 172.2… (RIS Media).
Do you have any thoughts or opinions on this subject? Let Michael Know at his contact information below.
Michael Haltman, President
Hallmark Abstract Service