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This weekend marks the 10th anniversary of the Lehman Brothers bankruptcy, an event that triggered the worst financial crisis in nearly a century.
Leading up to the anniversary, dominating headlines this week have been stories asking “what could cause the next financial crisis?” and discussing what risks are lurking just around the corner.
And some of the biggest names on Wall Street are already beginning to sound the alarm for the next crisis.
Bridgewater Associates’ Ray Dalio said this week “We’re in, I would say, the seventh inning of the cycle. …Maybe we have two more years.”
Dalio said of the next crisis, “I think it will be more severe in terms of the social, political problems. And I think it will be more difficult to handle… It won’t be the same in the terms of the big-bang crisis. It’ll be a slower growing, more constricting sort of debt crisis that I think will have bigger social implications and bigger international implications.”
Former Fed Chair Ben Bernanke agrees, saying back in June, “In 2020, Wile E. Coyote is going to go off the cliff and look down.”
Like Dalio, Guggenheim Partners’ Scott Minerd warned last month that the market rally is in its “last hurrah” and warned investors to sell before things take a turn for the worse.
But Morgan Stanley strategist Mike Wilson believes we’re already in what he calls a “rolling bear market.”
“We believe we are in a ‘rolling bear market,’ a market where risk assets across sectors and geographies reprice to account for the removal of central bank provided liquidity,” Wilson said.
“Less central bank liquidity support as we near the end of an economic cycle should bring higher volatility as risk assets and markets lose some of their ability to absorb shocks. Our call is not for a simultaneous and large repricing across risk assets, but for a bear market that rolls through different assets and sectors at different times with the weakest links (Bitcoin, EM debt and equities, BTPs, funding spreads, base metals, and early cycle industrials like home builders and airlines) being hit first/hardest,” Wilson continued.
So what should investors do now?
Dalio says investors should be “more defensive” rather than more aggressive. And Wilson recommends selling stronger parts of the market and rotating into value sectors. One of those strong sectors Wilson warns investors should begin moving out of is tech.
“It makes sense to lower broad exposure in the near term as elevated valuations, lack of material earnings upside against expectations, extended positioning, technicals, and trade related risks all add up to a poor risk reward for the sector in the near term,” Wilson said.