Another week, another member of the elite rings the alarm on the growing risk in the financial system.
Harald Malmgren was a senior economic adviser to presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon and Gerald Ford. A consummate insider, he was sent on covert economic missions to negotiate with other countries, without the knowledge of the US embassies within them, or even the US State Department.
Today, he’s sounding the alarm, giving a time and a place for the next global financial crisis.
From a recent interview with Real Vision, when asked what must be addressed to avoid a global financial crisis, he answered (emphasis mine):
“Well, I’m not sure we can avoid a crisis. I think the question is how should we – when one begins to show itself, how are we going to manage it? Right now I don’t think anybody is ready for it. I think that the Federal Reserve, and the ECB [European Central Bank], Bank of Japan – they pretty much exhausted all the kinds of things they can do on their own. [The] Bank of England has a disorganised government at the moment, but they would need guidance.
“And if we look to the leaders, it’s hard to see where the leadership would come from. The ECB can’t do anything without the Germans giving it a green light. It’s out of their pockets one way or another…”
As for the speed at which the crisis will overcome markets:
“… our markets work much faster than they used to do. Ten years ago the equity markets were heavily influenced by high frequency trading. So we had a lot of activity going in milliseconds. Now, that kind of trading covers commodities, bonds, options trading. So the speed of a downturn is going to be much faster than we ever experienced in the past.
“Humans will not cope. It’ll be all algo driven. And it’s going to require a pretty powerful interest in the central banks, but the central banks can’t really do it. It can’t use magic. They have to get government support, and the government leaders aren’t there.”
Then the kicker:
“The biggest risk at the moment is Italy, which may blow up September-October. And I think the leading political figures there do want to have a break with the EU and the euro. They want to introduce a parallel currency. And I think they will.
“So the markets are going to not like all of this. And if you get a really big crisis and a lot of selling of assets, then there’s no fire department to call. I think that the risk is that we will have a crisis that lasts a long time, whereas the last one was over fairly quickly, relatively quickly. I mean, you had a lot of firepower put to work within months.”
If you’ve been reading this letter for a while, you’ll know we’ve been warning of the growing risk Italy poses, and the perils that “Bloody October” holds in store, for some time.
The poet TS Eliot began his greatest poem, The Waste Land, with the claim that “April is the cruellest month”. But April was not cruel this year – at least, not for financial markets. The FTSE actually had a very good April. And although it was a wobbly month for the S&P, it still climbed.
We think the cruelty will begin in earnest in October. If Harald is right, the carnage could begin as soon as September.
Let’s enjoy the dusk of August while we can.
Until next time,
Editor, Southbank Investment Research