Lucky You! The Next Financial Crisis Is Coming

Financial crisis

The next financial crisis is coming. I’m absolutely certain about that. I just don’t know when.

Should you be worried about the next financial crisis? No, of course not! Unless you are not prepared for a financial crisis that is.

I consider myself lucky to be on a journey towards financial independence. Already now, I have net worth that can allow me to sustain my current lifestyle for a couple of years despite what happens during the crisis. Most people do not have that opportunity.

I have learned to love financial crises. I see a financial crisis as an opportunity to make financially sound decisions in a calm manner while most people panic. Warren Buffet is often cited for this opportunity:

“And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful”

– Berkshire Hathaway 2004 Annual Shareholder Letter

A financial crisis is a perfect time to buy stocks because many stocks are being sold at a bargain.

At the same time, I obviously feel very bad for people that are not prepared for the next financial crisis. For these people, a financial crisis will have severe consequences.

When will the next financial crisis come? I have no idea, but there will be several more crises in our lifetime – that is for sure!

Looking at the past few years, however, it is fair to say that the markets have been looking fairly bright. Following this, I believe that we are now starting to see some concerning trends in the global economy.

When will the next financial crisis hit?

Nobody knows when we’ll see a financial crisis of nuclear proportions again. However, as a general rule of thumb, the next financial crisis will arise when a lot of people lose confidence and become nervous at the same time.

I have collected a few graphs from different parts of the world wide web that I find disturbing and could point towards a financial crisis in the near future (or at least periods of stagnation). Some of these could lead to a lot of people losing confidence at the same time, which would make the markets crash.

We have had a great run in the past decade and people are starting to forget that things could be bad and markets could crash. This is when things become dangerous.

Governments and central banks across the globe have held interest rates historically low to create economic growth, and they have actually succeeded in creating a global economic upswing, but as soon as interest rates start rising (and they will have to at some point), we might face a different reality.

Another thing I am worried about is debt. Let’s have a look at the US debt balance:

Source: Federal Reserve Bank of New York

The US debt balance has been increasing rapidly in recent years following a decline after the 2008 financial crisis. We are now above pre-crisis levels, and if you remember how debt was packaged in all sorts of creative ways pre-crisis with extremely bad deals for the consumers, you will be as nervous as I am about this development.

You think the US looks dangerous? The US might actually have learned their lesson, so there’s actually countries that look more concerning when we look at private debt to GDP ratios:

Source: Steve Keen

Yes, the US private debt to GDP is on a slightly upward trend again, but take a look at some of the countries that did not learn the lesson from the last crisis. Countries like China, Korea, Australia and Belgium have had increasing credit bubbles ever since the financial crisis. China is definitely the fastest growing of them – and also has a significant size. What would happen with the global economy if China had a similar meltdown compared to what happened in the US in 2008 when the credit bubble burst?

Let’s have a look at the stock markets.

The price/EBITDA ratio is showing that we have never had a higher price per EBITDA in the history of mankind:

Source: David Stockman

This means that the prices of the company stocks in the S&P 500 have never been higher relative to how much the companies have in earnings (before interest, taxes, depreciation and amortization). This could indicate that we might be heading towards a market correction (at best) or a financial crisis (at worst) – especially when interest rates start increasing again.

People believing that the current market is a fair representation of the companies’ real value would argue that it does not factor in inflation, future earnings growth potential, new technologies, Trump’s policies etc. etc.

Do I believe them? To some degree, yes, but no, I really don’t. I don’t see how the market can increase 240% since March 2009 with the economy still creeping along at low growth rates. The S&P has consistently increased nearly every single month in the past seven years. I believe that this kind of optimism is most likely closer to a correction than to the early stage of a market increase… but I might be very wrong!

Let’s take a look the US savings rate:

Source: David Stockman

If a crisis were to hit, we might be in for a rough time – or at least the Americans might be. With less and less money in the bank to actually power through a recession, we might feel the consequences of a market correction, recession, stagnation/crisis a lot harder.

And as if low savings rates weren’t bad enough, we might be in a global real estate bubble getting closer to pre-2008 levels:

Global Housing Crisis

Source: International Monetary Fund (IMF)

… with some countries having very rapid increases in house prices going above pre-2008 levels:

Western Housing Price Inflation

Source: The Telegraph

Ok, ok. Let’s relax. I’m painting a doomsday picture, I know. I’m taking a lot of different graphs and try to draw simple conclusions from very complex interdependencies (or lack hereof). I might be creating fear without reason.

I just find these graphs super interesting. I know that there’s many underlying things that could explain the trends on the graphs. I also know that the trends on the graphs above do not necessarily lead to a financial crisis.

But I still find some of these hockey stick growth patterns somewhat worrying.

I am certain that I will experience more financial crises in my lifetime, but whether it is tomorrow or in 10 years, I can’t say… and the graphs probably can’t either.

The good thing about it all? I don’t care what happens because I have my strategy set.

How to behave during the next financial crisis

If you are on a journey towards financial independence or are investing for the long run, you have less to fear. Crises will come and go. Your net worth will increase, your net worth will decrease, and hopefully, it will mostly increase.

At all times, I believe you should be focused on building up your net worth and save as much as you can every month. This makes you able to withstand large decreases on the stock market or getting laid off from work for a certain period of time.

The good thing about pursuing financial independence is that you most likely already live a relatively frugal lifestyle, so if the crisis hits, you can easily cut your spending to the bare necessities. You don’t have to pay for an expensive yacht or an over-sized house every month. This makes you able to ride out the storm.

Concerning investments, I believe you should set an investment strategy and stick to it in good and in bad times (this requires some strength!). I keep on investing when the markets are down. This is when you get the best bargains as crises are bargain fiestas! But I also invest when the markets are up. You might invest at the top and lose money, but you also invest at the bottom and gain a lot. If the markets continue growing overall in the long run, we’ll be fine.

Instead of being afraid of when the next financial crisis will happen and what will happen, we should embrace the next crisis and act wisely while we ride out the storm. The next financial crisis will be a lot more fun if you are prepared for it!

What do you think? Am I being way too pessimistic about the future? Let me know in the comments.



Bart Engelen April 11, 2019 - 13:12

Not sure about the other countries, but the Belgian debt to GDP is actually 103%. Nowhere near the 230% that graph seems to imply. The Australian debt to GDP is 41%. The numbers are way, way off.

Carl Jensen April 12, 2019 - 22:51

No, the numbers are actually correct. When you look at the private debt to GDP, you get exactly what is in the graph:[email protected]/BEL/CHN/AUS/USA/GBR/KOR

Bart Engelen April 12, 2019 - 23:15

Well, if you look at private debt to GDP you are correct, however the graph is still very biased as you are leaving a lot of countries with an even higher debt ratio out of the graph. Here are the full world numbers:

Belgium is by no means world leader…in fact the Danish private debt to GDP stands higher at 275% (it’s the same in the link you gave). In fact, for most if not all Western countries the graph looks the same. These numbers alone have little meaning as for the US, the private debt consits largely out of high interest credit (card) debt while in Western Europe this is mostly very low interest mortgate debt.

Carl Jensen April 15, 2019 - 09:00

You are very right, but the intention was not to paint a fully exhaustive view on all countries’ private debt to GPD ratios. You are also right that there’s all sorts of explanations below each of those ratios. The intention of the graph was to show the trend in increasing private debt to GDP levels that could be bad if things start turning ugly.

MsTJ January 13, 2019 - 23:44

Hi Carl.
I agree with SteveArk. Have personally been through many corrections and see them as only a sale on stocks.

When I read the title I couldn’t wait to read what you had to say about it. This past January I paid $61 for shares I purchase monthly, where before it was $65 and above. When stocks are on sale (market corrections) my regular monthly purchase buys many more shares than I have been able to in the recent past. I love corrections and am waiting for the next.

Looking forward to reading your other posts.

Carl Jensen January 14, 2019 - 11:04

I feel exactly the same way, MsTJ. Even though I’ll be honest and say it felt bad when the markets declined in December, it felt much better to buy shares in January. It’s just important to remember that when markets start declining more.

Richard Jackson January 13, 2019 - 14:36

One thing we know for sure at the moment is that there is a lot of volatility around. There is a good chance that a recession or downturn could happen again soon, but there is also a good chance the market could rally, who knows! Personally I am still investing, but I’m also holding 18 months cash which is higher than normal. If the market crashes I’ll take my cash and put it straight in the market. If not, then I can still sleep at night and my net worth will continue to grow anyway, just a little bit more slowly for a while. @mrfire+ice #chooseFI

Carl Jensen January 13, 2019 - 18:51

You are very right. You never really know when it hits, but being prepared is the best thing you can do. I like the idea of keeping a good amount of cash to invest when markets start falling. I might do the same thing, but it of course comes with an opportunity cost.

Steveark January 4, 2018 - 23:35

I was all ready to hammer a 27 year old for trying to time the market the way your post opened up and then you gave as good advice as I’ve ever seen about setting a consistent investment plan and sticking to it. As a guy who is twice your age and has ridden through corrections and bear markets in the last several decades doing exactly what you advise I will confirm it worked for me! Pretty smart millennial you are.

Carl @ MoneyMow January 5, 2018 - 18:39

Haha, I am glad to hear that the introduction had that effect 🙂

Thanks for the kind words. I am happy to hear that it also works in practice through different corrections and bear markets. I have only experienced one financial crisis myself, so the strategy in the post is obviously based on limited personal experience and more on what I’ve been able to read elsewhere.


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