Is this time really different?
I have been slowly perusing this fascinating book over the past year.
This Time is Different is authored by Carmen M. Reinhart, chief economist of the World Bank Group, and Kenneth S. Rogoff, previous chief economist of the IMF and professor of economics at Harvard.
The book uses the largest historical database of financial values ever assembled to draw conclusions about what causes financial crises.
They explain different types of crises, including debt crises, inflation crises, currency crashes, and banking crises. These days, it seems that banking crises are the main type that slam first world, advanced economies. Especially the US, the banking capital of the world.
Bank crises are otherwise known as bank runs, or liquidity crises. Where everyone goes to retrieve their money at the same time and, suddenly, there is no money. The implications of this type of situation are far reaching, but this is what happened during the Great Depression as well as the 2008 mortgage crisis or Great Recession/Contraction.
Where we stand today, I believe that we may have checked most if not all the boxes laid out by Reinhart and Rogoff regarding banking crises.
I will lay them out here and explain why I believe we have checked each box.
Capital Flow Bonanzas
A sustained surge in capital inflows. This is probably the weakest indicator of all that we are facing a banking crisis, although we had a significant capital flow bonanza in 2015-2017.
They explain that there should be banking crisis within 3 years of that bonanza, which would have potentially been 2020, in which we did have a banking crisis that was averted by extreme quantitative easing.
It seems we may still be in that "hidden crisis" now, but that is absolutely debatable.
Equity and Housing Price Cycles
The pattern outlined in the book is:
"a boom in real housing prices in the run-up to a crisis is followed by a marked decline in the year of the crisis and subsequent years"
"Bordo and Jeanne, also studying the advanced economies during 1970-2001, found that banking crises tend to occur either at the peak of a boom in real housing prices or right after the bust."
Housing cycles are persistent historically at 4-6 years long in advanced economies, based on their data.
The cycle is, on average from 1920-2007 over 40 episodes: the boom is a 50% rise over 3 years, followed by a 35% drop over 2 years.
Where we are now:
We are in a protracted boom, with a 65% rise in real property prices over 11 years.
The chart above does not reflect this, but new home sales tumbled 16% MoM in April.
Who knows what happened in May, but my network tells me it has gotten much worse.
The commercial Real Estate market, meaning mortgages for investment properties like apartment buildings and offices, is super leveraged as well.
Overcapacity Bubbles: Tech
This represents the amount of new companies coming to the market looking to raise capital. It is hotter than it has ever been - and everyone says it is because technology has changed the world.
The tech space was way overbuilt, with many companies raising incredible amounts of capital without making any money.
See the amazing chart below - about 80% of IPOs were not profitable, matching the 2000 tech bubble.
People assumed they could simply take their company public and make many times their revenues, never mind profit. That is symbolic of a bubble - people rushing to buy something whose only value is selling it to the next guy for more money in hope of future profits.
Overcapacity Bubbles: Financial Industry
The authors quote Phillippon, who proposed that the Great Recession of 2008 was partially caused by an unsustainable rise in the financial sevices industry, from a historical 4.9% average to 7.5%.
We are now about that level yet again.
Conclusion
I leave it to you to review the facts, and hopefully read the book, and come to your own conclusions.
My personal takeaway is that we are in a situation with some red flags, particularly in the real estate and financial services sectors.
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Here are some articles I found eye opening about the current times:
Wild card commodity sanctions are causing a new subprime crisis
https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/we-are-witnessing-the-birth-of-a-new-world-monetary-order-202203.html
Fed commits to raising rates until prices come down (crash)
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