The US corporate credit cycle seems to have turned with rising bad loans leading to banks tightening corporate credit conditions. This can be self-reinforcing. So I send a 'yellow card' warning to investors that we're 70 minutes into the match and we could see a recession in 2018.
In Alfred Hitchcock’s famous 1963 horror movie, The Birds, a series of unpredictable and menacing bird attacks spook an otherwise peaceful town. Since March, financial markets have been quite peaceful, but they are clearly also being swayed by unpredictably dovish and hawkish central banks.
China is boosting growth through leverage. Since China already sports one of the highest debt levels worldwide, investors are rightly concerned about a financial crisis. We also see China on course for a financial crisis, but feel the crisis is still a few years away.
The eternal truth in financial crises is that debt is the heart of the problem. Without debt, there is no leverage and no forced selling. Warning lights are now flashing across emerging markets. Timing the next debt crisis is extraordinarily difficult, but we know where to look.