As Jamie Dimon Says Lehman Won’t Happen Again, IMF Analysis Points To Next Global Financial Crisis

As Jamie Dimon Says Lehman Won’t Happen Again, IMF Analysis Points To Next Global Financial Crisis

Nearly one month after JPMorgan Chase chief executive Jamie Dimon told Congress that another Lehman-style market crash is not a concern, the International Monetary Fund has a different message. Global debt levels are elevated to extreme levels and the IMF is warning about a coming global financial crisis.

Increasingly the IMF is being called to bail out troubled economies and the need is growing to never before witnessed levels. The IMF released its spring 2019 economic analysis noting that if unsustainable debt and risky market behavior are not brought under control, we could see another global financial crisis.

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“Developing countries are wrestling with crisis,” UN sovereign debt analyst and Executive Director of Jubliee USA Eric LeCompte told ValueWalk, pointing to a virus that could quickly spread to the developed world. “There is more than one canary in this coal mine.”

The IMF has released a series of reports on unsustainable debt levels in developing economies that it says makes the global environment “unsettled.”

“This is a delicate moment for the global economy,” Gita Gopinath, the IMF’s director of research, wrote in an April 9 blog post. “If… any of the major risks materialize, then the expected recoveries in stressed economies, export-dependent economies, and highly-indebted economies may be derailed.”

LeCompte notes that even with a relatively strong global economy, many developing nations are finding trouble with GDP to debt levels above 100% and 17 countries are in default. He was moderating an IMF panel discussion on the topic when unknown derivatives risk exposures tied to the debt was raised as an issue that could derail the economy, calling it “the scariest IMF meeting I’ve ever attended.”

The IMF, for its part, sees direct comparisons with the 2008 financial crisis, where unsustainable sovereign and corporate debt combined with bank derivatives blended to create a toxic economic mix that led to the great recession, the reverberations of which are still being felt.

The debt crisis is now engulfing 40% of low-income nations with the IMF concerned of rising debt levels in African nations that is even starting to impact wealthy regions such as Kenya and South Africa. What also concerns LeCompte is how the debt problem is spreading in Latin America, right on the doorstep of the US. Brazil, El Salvador, Venezuela and Argentina are all showing signs of cracking under a mountain of debt. According to LeCompte, three Latin American countries are beyond 70% debt to GDP.

Argentina, which lost a debt fight with hedge funds led in part by Paul Singer’s Elliott Management, is particularly hard hit. Investors are now pricing in a 49% chance of default, up from 22% a year ago, according to credit-default swaps pricing.

“In Argentina, public money (from the IMF) is bailing out hedge funds,” LeCompte quipped, noting that solutions for another global debt crisis have not been put in place.

Many nations battling high debt levels find it to be a vicious cycle. Austerity measures put in place to pay bondholders lead to reduced government spending that gets back to the economy, which leads to lower economic output and ultimately less money to pay down the debt. Another issue hitting many developing nations, particularly Venezuela, is lower oil prices are crimping revenue at a time when it is most needed.

In response to the crisis, the IMF is attempting to do higher monitoring of the debt situation so global leaders can track at risk nations, many of whom approach China for debt relief, LeCompte noted. “Often debt deals with China are secret and they often give up natural resources for some type of debt relief,” he said, pointing to moves that lead to global strategic vulnerabilities.

LeCompte advocates for a common, global standard to restructure debt while at the same time seeking curbs on predatory lending.

This article first appeared on ValueWalk Premium

Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)
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