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Why USA will have another crisis - Robert Gay (ex US Fed)

At the Portfolio Construction conference 23-24 August, Robert Gay gave his reasons why another crisis is on its way for the USA. His thoughts included the following:

  • Next crisis will hit investments with limited liquidity very hard. Robert clearly had the view, that it is inevitable that we have another crisis.

  • US asset prices high ... in response to rapid growth in monetary base in the USA.

  • Inequality - Robert sees inequality (major divergence of financial health of the wealthy vs the rest) as a key reason why GDP growth in countries like USA, UK, Australia as being so low/weak.

  • Potential catalysts for the next crisis:

  • CLOs - Collateralised Loan Obligations (I sent a circular around about these CLOs on 4th August). AFR article on risk from Collaterised Loan Obligations

  • ETFs - Robert says, you don't know what you own any more. If you dig under the bonnet of many of these ETFs, there are are more risks that you do not know about. Robert worries about potential lack of liquidity and gapping for many ETFs.

  • Cause of recessions:

  • bank lending more into higher prices (as we have seen in recent years)

  • eg even equities can cause a recession - eg a crash when banks call in their lending, leading to a consumption strike.

  • A key indicator of recession - bank lending,

  • Australia's bank lending warning light is on - Robert Gay thinks this may well be a major cause of Australia's next recession.

  • Robert pointed out the IMF's research/guidelines that when total debt/GDP of a country is greater than 70pc, the economy is vulnerable to a crash/crisis. Clearly Australian is a long way into this territory.

  • Because of these issues, Robert thinks you needs to be considering your strategy options to deal with these eventualities.

Dr Robert Gay, Ex-US Fed

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