The next crisis is lurking just below the surface and it might not take much to set it off.

As humans we have managed to solve just about every problem thrown our way, like communication, transportation, human rights, famine, plagues, and global wars. But we are yet to solve the economic cycle.

Since 1776, when Scottish economist Adam Smith first penned the term "an invisible hand" in Wealth of Nations, describing his version of capitalism, the world's economists, investors and bankers have all tried desperately to control, predict and potentially remove "cycle" from economic cycle.


To date, all attempts have failed. We remain in an environment of boom and bust, misallocated capital, unintended consequences and are left always with the failings of capitalism.

That is to say capitalism has no ethics, no morals, and it doesn't care if prices are too high or too low. Nor does it care about winners and losers, or poverty, or wealth. But it does hold true that eventually, mispricing of assets is resolved by market participants.

I'm not alone in my concern about how this current boom will end.

A number of top financial experts are now quietly suggesting that when the current ageing expansion rolls over, the inevitable slump could be worse than the most recent financial crisis from 2008, dubbed the global financial crisis (GFC), which had a combination of all of the above.

A bubble in US real estate caused a banking and credit crisis that spread globally and then later turned into a global economic crisis — the worst since the 1930s Great Depression.

What's interesting to consider today, since we are now on the 10-year anniversary of investment bank Lehman Brothers' bankruptcy, which at more than US$600 billion remains the largest in history, is that many citizens around the world did not, and still do not, comprehend how close our way of life came to complete collapse.

For better or worse, we live in an integrated global financial system. Our lives function on consumerism and our economic growth depends on the availability of credit.

For all this to work we must trust banks and paper currency.


It's the reason why people don't barter anymore. If you have US$1000 you can walk into any shop anywhere in the world and exchange that paper money for goods or service. It doesn't matter what race, religion or ethnicity you are, we all "believe" in money, and trust the value of the US dollar.

If (as was possible in 2008) all the banks had been allowed to fail, trust in the system would have "gone out the window".

Unemployment would have soared, bartering would have re-emerged and anarchy or violence would have followed until order was restored back to the old system we know.

We know this because countries like Greece are an example of what can happen.

In the end, order was only restored by a return to the old system.

Like it or not, we are addicted to money. Our modern lives need it to function and there's no alternative.

We also need banks to extend credit for economies to grow, and we need governments to provide stable currency. This, of course, is a long-winded way of saying that the last crisis saw us very close to the abyss.

So, turning to 2018 and beyond, where is the next financial crisis going to emerge, and when?

We already know that we have experienced an historically extended period of prosperity since the GFC, and US shares are in the longest bull run ever.

However, the capitalist system doesn't operate to a set of rules or guidelines. Yes, "an invisible hand" eventually resolves over, or under, valuation but there is no set timing to this — bull markets don't die of old age.

Therefore, asset prices could continue to rise for years to come.

However, the following areas should concern you and are a good place to start looking for where the next crisis will emerge.

Although banks have been strengthened and in some countries are backed by as much as 10 times more equity capital than a decade ago, the financial risk has shifted to non-bank financial institutions — in particular technology companies — becoming systemic players in the finance industry.

The problem is, tech companies fall outside traditional financial regulatory environments and policymakers are behind the eight-ball keeping a watch over these disruptors.

By most measures another crisis already looks well overdue. Given that the last financial crisis was caused by indebtedness, it's surprising and shocking to see that global debt has risen by 75 per cent to around US$250 trillion in the last decade.

It's clear from this that we've borrowed our way to growth, again. Yes, this is another credit-led boom. Ultra-low interest rates have also inflated asset prices to cause a bull market in just about everything from fine art to tech stocks to French government bonds.

Central Banks and governments are now more indebted, and with interest rates still low, and negative in many countries, there isn't the ammunition available to avert the next crisis like there was before, let alone the political will. Yes, we can do more of the same but with less and less of an effect.

The rise of populist parties around the world, as a result of increasing inequality and globalisation, has led to protectionist parties and disenfranchised citizens.

And although these might be stable now, remain simmering just below the surface in many countries.

Trump, Brexit and far-right parties are all a by-product of this.

The current trade war between the US and China may be just the first act of this drama and it could potentially be very damaging to economic growth — and ironically have very little impact in reducing the US-China trade deficit.

Then there's my personal biggest concern, algorithmic or automated trading, driven by the massive surge in passive investing.

When equity prices fall or there are redemptions for passive funds, the liquidity will dry up and with a reduced number of active investors this could very easily lead to a traditional stock market crash.

We witnessed in February this year a surge in volatility when just a handful of ETFs collapsed. I don't think we've seen the last of this.

Remember, history doesn't repeat in finance, but it rhymes. Meaning, don't go looking in the same places as last time to find clues. Because each crisis is unique.

However, with more debt in the system and central banks having less ammunition, fighting the next crisis could prove just as challenging as the last.

- Mike Taylor is the chief executive of Pie Funds.