Categories: Base Metals / Energy / General Market Commentary / Precious Metals
Topics: General Base Metals / General Energy / General Market Commentary / General Precious Metals

Where the Next Crisis Will Come From

Where the Next Crisis Will Come From

Keep an eye on depressed lenders, shadow banks, and China.

Next year ends in a 7. If you’re superstitious or a little loose with statistics, that makes us due for another financial crisis. The biggest one-day stock drop in Wall Street history happened in 1987. The Asian crisis was in 1997. And the worst global meltdown since the Great Depression got rolling in 2007 with the failure of mortgage lenders Northern Rock in the U.K. and New Century Financial in the U.S.

You can’t really mark the next crisis down on your calendar, of course. The point is that crackups come fairly regularly. And some of the prerequisites for the next one do seem to be falling into place.
The International Monetary Fund may have gotten things about right in its annual Global Financial Stability Report, which was issued in October. It doesn’t sound an alarm but expresses concern. Short-term risks have actually abated, the IMF says, pointing to rebounding commodity prices, which help some key emerging markets, and the prospect of easier money in developed markets. But, it says, “medium-term risks continue to build.” It cites the unsettled political climate, which makes entrenched problems harder to tackle; some weak financial institutions in developed markets; and heavy corporate debts in emerging markets.

Risks that aren’t acute can build for a while before triggering a crisis. What’s indisputable is that debt, the tinder of almost every financial conflagration, is growing rapidly. At 225 percent of world gross domestic product, combined public and private debt outside the financial sector “is currently at an all-time high,” the IMF says. Debt fuels growth but also makes borrowers brittle. Debtors keep owing money even if they lose the ability to repay. If they default, their lenders are damaged and sometimes default on their own obligations, and so the dominoes fall.

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