The financial crisis of 2008 was the biggest since the Great Depression and had its roots in the bursting of the housing and mortgage market bubble. At the time there were financial analysts that sensed trouble ahead and warned of it. None, however, knew the magnitude of what would unfold, which saw the failure of venerable Lehman Brothers followed by trillion-dollar government-funded bank bailouts.
Barron’s writer Howard Gold recently interviewed four experts who came very close in those days to forecasting the epic events that rocked the world. He wanted to see what they see ahead for the world financial order today. Here is a synopsis of these experts’ views and you will notice a common theme: all are very concerned about unsustainable debt loads.
The Four Forecasters and their outlook
Gary Shilling, president of A. Gary Shilling and Company consulting, saw the developing housing crisis and predicted in June of 2006 that “the [speculative housing] bubble’s break will cause widespread pain…and be much worse economically than the 2000-2002 bear market.”
Today Shilling frets about the $8 trillion in emerging market corporate and sovereign (government) debt which is dollar-denominated. The U.S. dollar is rising in value, which makes it increasingly difficult for the emerging market debtors to service their debt load. Almost $250 billion is due next year.
Jim Stack is president of Stack Financial Management and in 2005 described the housing market as “a dangerous bubble” that would require a $1 trillion + government bailout of the mortgage industry.
Although Stack sees choppy waters for the housing industry ahead, his real concern is corporate debt, noting that in 2005 corporations issued a five to one ratio of high quality debt to low quality, but in the past year that same ratio was almost one to one. In an economic downturn, that risky debt is the most vulnerable to default.
Raghuram Rajan is a former chief economist for the International Monetary Fund and teaches finance at the Booth School at the University of Chicago. Rajan argued in 2005 that more robust linkages between financial institutions made it easier to sustain small shocks collectively, but made the larger system more vulnerable to a seismic financial event as eventually happened.
Today Rajan also sees danger in corporate debt and the emerging markets, but points out that the “shadow banking” industry has taken on more risk and that central banks are still creating asset bubbles. “You get hooked on leverage,” he says, adding that there are “accidents waiting to happen.”
John Mauldin is chairman of Mauldin Economics in Dallas with a million subscribers to his newsletter. In 2007 he foresaw trouble in the unregulated Credit Default Swap market, which eventually played a crucial role in the mortgage meltdown. In 2006 he predicted a bear market and noted that equity markets typically fall 40 percent before and during a recession.
Mauldin estimates that the world has $500 trillion in debt and unfunded pension liabilities. He sees European debt, and particularly Italy, as a flashpoint that could lead to the next global recession.
Our own forecaster
Listeners to Jerry Tuma’s Smart Money Radio know that Jerry has been pointing out each one of these current risks for months now.
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