It is often said that those who do not learn from history are doomed to repeat it — and JPMorgan’s chief investment officer believes markets need to go through a history refresher course.
Bob Michell, responsible for managing $700 billion in assets for the world’s most important bank, believes there are too many current parallels with the 2008 global financial crisis to simply dismiss the idea of spinning out of control.
Although three of the four largest bank failures in US history occurred this spring, economic data has proven resilient and stock prices have continued their rally higher, buoyed by hopes for the next productivity boost thanks to generative AI.
Fifteen years ago, JPMorgan famously bought Wall Street’s fifth-largest investment bank, Bear Stearns, in a government-brokered deal to stave off its collapse — unlike its recent acquisition of First Republic Bank that appears to have stopped further contagion among regional lenders.
“It reminds me so much of that period from March to June of 2008,” Michelle told CNBC. in an interview on Friday, pointing to the three-month rally that followed the Bear deal. “The markets looked at it like this: there was a crisis, there was a policy response and the crisis was resolved.”
Michel is now stressing testing his assets for a 3%-5% contraction in economic activity over two quarters, because he doesn’t buy into rosy predictions from Goldman Sachs that the US can escape even the kind of mild recession that has already hit Europe.
“It would be a miracle if this ended without a recession,” said Michelle, who also works. Fixed global head He entered JPMorgan’s asset management arm.
The sheer scale of the economy can often mean that by the time the façade leaks set in, the structural damage has already been done.
Risks abound, from stock prices to commercial real estate
Not many Wall Street veterans started their careers the last time the US faced inflation rates that high, and the subsequent tough tightening by the Federal Reserve may not have been felt. This is because of real rates – that is, once adjusted annual inflation rates 4.4% using the Fed’s preferred metric — they have, while no longer negativehas not reached the point where it constitutes a material limitation to economic growth.
And although residential real estate has become less of a concern, vacancy rates in the commercial real estate sector have increased following the shift towards remote work.
More than $1.4 trillion in US REITs are set to come due by 2027, with just $270 billion due this year, According to real estate data provider Trepp. Much of this debt will have to be carried over at higher rates.
“There are a lot of companies that rely on very low-cost financing,” Michelle said. “When they go to refinance, it will double or triple or they won’t be able to (refinance) and they’ll have to do some kind of restructuring or default.”
Another red flag for investors is the shock from debt ceiling negotiations. The Treasury’s general account, Uncle Sam’s Fund, is nearly depleted by restrictions on the issuance of new IOUs that were in place until the talks were resolved.
Now a trillion-dollar tsunami of quality government paper is due Hit the markets before Septemberwhile Michele warned that the Fed is already draining $95 billion of liquidity — the oxygen that fuels asset prices — every month through quantitative tightening.
Should investors like billionaire Ken Griffin, the head of Wall Street? The most successful hedge funddeciding that the AI-related hype is more of a bubble than a warrant in current valuations, outflows from riskier stocks to safer bonds that yield respectable returns could put pressure on stocks.
The economic threat was completely ruled out to the end
What few may remember is that the subprime mortgage crisis was actually a train wreck moving so slowly that few people could have imagined at the time the disaster that was to befall the world in the latter half of 2008.
It can be said that the starting shot came back in End of March 2007when Federal Reserve Chairman Ben Bernanke told Congress that spillover risks to the broader economy arising from the subprime mortgage market were “probably contained.”
By the time he spoke, New Century Financial, America’s largest independent provider of loans to homebuyers with poor credit scores, was already teetering on. Next week it will be at the end File Chapter 11 bankruptcy.
Problems at Bear Stearns did not begin to appear until the following June, when the investment bank designed a $3.2 billion bailout One of its hedge funds speculated on the US housing market.
Her wedding in March 2008 to JPMorgan seemed to be a milestone in the crisis, but it took another six months before Lehman Brothers went bankrupt.
And just as importantly, Lyman, while the most spectacular victim, was by no means the only one.
The American Insurance Group, the largest insurer in the world at that time, required an impressive amount $182 billion in taxpayer aid because of Risky bets Taken by a few London employees at AIG Financial Products, a relatively unknown unit.
Fannie Mae and Freddie Mac, the two government-sponsored companies that back nearly half of all American home loans, have become the state’s guardians. Big banks like Washington Mutual, Wachovia and Merrill Lynch either collapsed or were gutted on the cheap.
“There are a lot of things that resonate with 2008,” Michelle said. “However, until that happened, it was largely dismissed.”