With the newspapers full of articles describing the onset of the Great Financial Crisis ten years ago (a few weeks late in my view), I’ve also started to see articles speculating on what will cause the next one.
So, for your guide and entertainment in this, the tedious heart of summer, I present the runners and riders along with some helpful odds.
No More Banking Crises – 100/1
There is an optimistic part of me that in my tenderer years would back a no-hoper horse at very long odds on the theory of: ‘what if it wins?’ If I were to back ‘No More Banking Crises’, I would be succumbing to the same misplaced youthful optimism. There have always been banking crises; there will almost certainly always be banking crises. I know the regulators have been toiling away on Dodd-Frank and BIS capital rules and all the rest of it, but it would take the most naïve of market observers to think that this time they’ve cracked it.
That said, this horse’s odds are attractive, so knock yourself out if you want to.
Cryptocurrency Crisis – 40/1
If something unexpected were to bring down the financial system wouldn’t it just be totally fitting if it had the ultra-cool tag ‘crypto’ in its name? Hence the enthusiasm for this horse. Cryptocurrencies like Bitcoin and its competitors are created in the hearts of computers and rely simply on trust to function. What if everyone starts using them and the trust disappears? Fans of ‘Cryptocurrency Crisis’ ignore the fact that: a) the amounts in play are really small (about $100 billion all told) and b) we’ve been doing fine for crises using regular, everyday fiat currencies (created in the hearts of computers and relying simply on trust to function) for decades.
Maybe one for the future?
Careless Car Loans – 20/1
Backers of the filly ‘Careless Car Loans’ to be the winner of the Cup point to the explosive growth in car finance. What if people can’t pay and it all ends up like sub-prime mortgages?
It’s a tempting theory since the sums are pretty large: a car, for most people, is the second biggest purchase they’ll ever make after a home. In the USA, outstanding car loans now total just less than $1.2 trillion and delinquencies are rising. But the key is ‘second biggest’. Outstanding mortgages on homes dwarf this figure. The equivalent figure for housing loans in the USA is $14.4 trillion.
A decent horse for an each-way bet, but probably not a winner
Algo Anarchy – 15/1
From the same stable as Cryptocurrency Crisis, Algo Anarchy’s odds have tightened in recent years. Increasing financial automation and numerous recent flash crashes (of both equity and currency varieties) have started folk to wonder whether tightly linked rogue computers could create a big enough dent to spark off a crisis. And even if they couldn’t, maybe a hacker or a global virus could do the same thing? A horse beloved of the writers of spy fiction and by the editors of the racier daily newspapers. One to watch, certainly.
Euro Breakup – 10/1
Very fancied until recently – almost odds on – but now the odds are drifting; a horse that is certainly capable of creating chaos but is now visibly ageing and tiring. Punters are questioning whether jockey Mario Draghi really has the ability to pull through to win the ‘Next Crisis Cup’ against an increasingly competitive field. A horse that I backed until recently but now my enthusiasm is waning.
CLO Carnage – 7/1
Collateralized Loan Obligations are from the same bloodline as CDOs, which did so well competing in 2007/8. Backers of this short-odds horse cite the growing volume of structured loan instruments and the weak controls upon them: “banks … continue [to ] support what has become a very frothy corporate debt market, increasing the risk of another 2008-like cataclysmic financial event.”
Doubters point to the relatively small size of the market (about $1 trillion) and better product design – according to them we are no longer using CLO 1.0 or even CLO 2.0, but rather CLO 3.0 these days. No, me neither.
China Bond Blowup – 5/1
A flood of hot money backing this nag has shortened its odds a great deal recently. Backers point to problems with China’s money supply, high leverage, recent debt downgrades and its slowing economy (albeit from stellar levels in the past). Tension on China’s border caused by the stand off between North Korea and the USA add to the horse’s appeal.
Probably a little expensive.
Obvious in Hindsight – Evens
Last, and by far and away the favourite horse in the race, ‘Obvious in Hindsight’ has a stellar track record. Winner in 1997/8 and 2007/8 and is still looking strong. Exactly what will cause the next crisis isn’t now known but, of course, it will be Obvious in Hindsight.
It may seem expensive at evens but it’s well worth a punt.