The Next Financial Crisis Will Occur in 2020: JPMorgan Chase

JPMorgan Chase & Co believes the next major financial crisis is just around the corner. In a new model devised by the Wall Street megabank, a recession will strike the U.S. economy by 2020.

Financial Crisis Looming

JPMorgan Chase has devised a new financial model to gauge the timing and impact of the next financial crisis. In a recent note to clients, the firm said the next major reckoning will be caused by diminished liquidity following the 2008 financial crisis.

According to the model, which evaluates outcomes based on economic growth, asset-price valuations and the degree of leverage in the market, the next meltdown could hit the markets as early as 2020 and produce the following results:

  • 20% drop in U.S. stock prices and 48% slide in emerging-market shares
  • A 1.15 percentage-point rise in U.S. corporate bond yields
  • A 35% decline in energy prices
  • Declines of 29% in base metals
  • A 2.79 percentage point increase in spreads on emerging-market government debt

“Across assets, these projections look tame relative to what the [global financial crisis] delivered and probably unalarming relative to the recession/crisis averages” of the past, JPMorgan strategists John Normand and Federico Manicardi wrote, as quoted by Bloomberg. The strategists said “structurally less-liquid markets” were the biggest wildcard facing the financial system.

While devastating, the bank said the next downturn is unlikely to be as severe as the global financial crisis of 2008. However, the shift from active to passive asset management will make it more difficult for the market to recover from a major drawdown.

Bitcoin as a Safe Haven?

Although few in the investment world would classify bitcoin as a safe haven, the digital currency could emerge as an attractive substitute if traditional assets enter a bear market. Bitcoin’s short and volatile history doesn’t diminish the fact that it is a non-correlated asset, which means its price tends to move independent of the broader market. As mainstream asset classes chug through the business cycle bitcoin tends to operate on different metrics altogether.

While some signs of correlation have emerged recently, such as bitcoin trading in the same direction as stocks, the link between “risk appetite” and crypto prices is weak. The author noted the presence of correlation earlier in the year but concluded it was probably a symptom of new traders buying cryptocurrency for the first time (and selling it when stocks plunged in February).

That being said, lack of correlation does not necessarily mean more relief. It simply means bitcoin could become a more suitable asset when stocks, commodities and other traditional assets begin to sell-off.

Bitcoin’s status as a potential safe haven is partially owed to its role as a store of value. The cryptocurrency has become an attractive investment vehicle even as its use as a medium of exchange remains limited. In the context of a global recession, this may warrant a second look from asset managers wanting to steer clear of traditional markets.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi

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