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J.P. Morgan Analysts Predict Next Financial Downturn to Arrive in 2020

Chris Gaetano
Published Date:
Sep 13, 2018

J.P. Morgan analysts, using complicated economic models, predict that the next financial downturn will occur some time in the year 2020, according to Fortune. Specifically, the model predicts a 20 percent decline in stock value, a bond yield premium of 1.15 percent, a 35 percent drop in energy prices, a 29 percent reduction in base metals, a 2.79 percent widening spread on emerging-nation government debt, a 48 percent slide in emerging-market stocks and a 14.4 percent drop in emerging currencies. The analysts believe that one contributing factor will be the rise in passive investing through investment vehicles such as index funds and exchange-trade funds; they expressed concern that this change will make it more difficult to respond to market disruptions. 

J.P. Morgan is not alone in having an imminent crisis on the mind lately. Bridgewater founder Ray Dalio recently sounded the alarm that the economy is starting to feel very 1930s, saying that he sees significant problems coming up in the next two or three years, which would put his timing roughly in line with J.P. Morgan's. While he said the actual impact would be less than that of the global financial crisis 10 years ago, he warned that its social and political effects might be even more pronounced, given the societal and economic changes since then. This, he said, is partially because of the combined effects of debt, pension and health-care burdens; the wealth and opportunity gap that create polarity and populism; and the reduced effectiveness of central-bank policies that makes it more difficult to reverse a downturn. Further, he said that central banks' standard tools, quantitative easing and lowering interest rates, will be less effective than they were in the past. 

Former Fed Chair Ben Bernanke and former Treasury Secretaries Hank Paulson (under George W. Bush) and Tim Geithner (under Barack Obama) made similar points when speaking on a recent panel. The veteran regulators said Congress has legislated away many of the tools that could be used to respond to another crisis, such as barring the FDIC from providing emergency support as it had during the crisis, placing limits on the Fed's emergency lending powers, and ending Treasury's ability to backstop money market funds. 

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