_The Wealth Report: Niall Ferguson warns tougher times are on the way

Professor Ferguson, who I interviewed at Stanford University in the heart of Silicon Valley, predicted the last recession in one of his 14 books, so it’s worth listening to what he has to say.

His words already seem prescient - between The Wealth Report going to press and its launch today we have already seen global stock markets stutter and Bitcoin shed over half of its value.

Find out why the professor, who was listed as one of the world’s 100 most influential people by Time magazine and writes a weekly column for The Sunday Times, thinks another recession could be on the way in this video or read the full transcript of the section of our interview where he outlines his case below. 

To find out what else is worrying Professor Ferguson read my full interview with him in the The Wealth Report. We will also be publishing more video content over the coming weeks.

The Wealth Report features research into global wealth trends and flows, explores the world’s wealthiest regions, the best performing cities for Ultra-High-Net-Worth investors, and the fluctuations of the world’s luxury residential property markets. 

_Transcript

_{Andrew Shirley: I suppose a lot of people were upset about the liberal order, they conflate it with capitalism and globalisation.  In a lot of people’s minds that ties in with the banking sector, which of course ties in with the global financial crisis, which many people blame the bankers for, which I think you predicted in one of your books.  Some people blame deregulation, but you argue that actually it is too much bad regulation that’s one of the big culprits behind the world’s fragile ability to withstand these financial shocks.  In fact, you’re already predicting another recession.  Why, when and how bad will that be, and do the wealthy need to worry about it, because they bounced back much more quickly than anybody else in the last crisis?}

_{Niall Ferguson: Well, if we take the story back to 2006, which is just over ten years ago, I began writing in my column [in the Sunday Times] that there was trouble coming because of the excess debts of US households and the government, because of particularly what was happening in the US real estate market with subprime mortgages.  Not many people had heard of subprime mortgages in 2006.  I argued that at some point, there would be a shock and the liquidity crisis that would result would cause as big a financial crisis as we’d seen in our lifetimes.  That series of articles then evolved into the book, The Ascent of Money, which was published just a week before Lehman Brothers went bankrupt in 2008.  So, I think my track record is quite good, and if I look back over my writing in 2006/07, I was pretty much on the ball as to what was happening and how big it would be, and not many other people were.  So, pat on back, well done Niall.  What happened next was more remarkable, and I think I didn’t read that so well.  I think I underestimated the ability of the central banks, particularly the Federal Reserve to counter what was potentially catastrophic chain reaction.  First, by cutting interest rates to zero, and then by engaging in quantitative easing, large scale asset purchases.}  

_{That policy was more successful than I expected in countering the powerful deflationary shock of 2008/09, and one of its direct consequences was that, all kinds of financial asset recovered in price, we didn’t have a great depression.} 

_{People who held onto the stocks as well their bonds, not to mention their real estate, were made whole remarkably quickly. We can now look back and say, ‘Well, that was exciting, but we’re now in a position than the US stock market is at a higher point than it was at its pre-crisis peak in 2007.’  The same is true of real estate in most major cities.} 

_{So, it’s almost like a bad dream, and everybody is now in a kind of cheerful mood, and they look ahead, and they ask themselves, ‘Where should we invest next?  Is Europe going to be the 2018 success story, or do we stick with emerging markets?’} 

_{It’s almost as if amnesia is beginning to set in.  That’s the very moment at which I feel obliged to ask, ‘Well, what will the next crisis look like?’  Nobody can be exactly sure, but I think there are a few reasons to watch out.  One is we can see, beginning with the Fed and the Bank of England, monetary policy tightening.  That is usually a sign that conditions are going to become less friendly.}

_{I think it will take a little while for this, really, to feed through to stock markets, but, this time next year, I think the world as a whole will start to feel the effects of this monetary tightening.  Then you have the demographic forces at work.  That’s terribly important, because we’ve lived through this period of a global labour surplus, and that’s really coming to an end.} 

_{So, labour markets are tightening.  Some people think that will lead to higher inflation.  I’m not so sure about that, because I think there’s an awful lot of structural deflation embedded in technology, but we can’t be sure.  We really don’t know whether labour shortages will be counteracted by the construction of robots.  When I add these things together, what I see is at least the potential for a change in the global macroeconomic climate, and I haven’t even mentioned politics.} 

_{Add, on top of that, populism of both the right and the left, the political uncertainty that Donald Trump alone has introduced into the international system, and the non-trivial probability of a war over North Korea, and I think we’re entering a new period.  Now, I’m not saying recession in January, February, or maybe even December next year [2018].} 

_{I think we might even sail through next year without any policy reverse, but I think the probability is rising that there will be a fundamental change in financial conditions, and the higher political risk that I think we’re seeing, more or less, everywhere is bound, I think, to weigh on assets sooner or later.}

_{So, I’m not giving you a date to liquidate your portfolio, but I do think that we’re entering a different period.  The post-crisis period is over.  We’re entering, perhaps, a new pre-crisis period.}  

_{Andrew Shirley: When that crisis comes, will it come, perhaps, as less of a bang than the collapse of Leeman’s?  Will it perhaps be more drawn out, more of a chronic crisis that stays with us for longer, because of these various factors that you’ve just mentioned?}

_{Niall Ferguson: It’s impossible to say anything about the next economic or financial crisis, except that it won’t be like the last one.  The more regulation you dream up to avoid the last crisis happening again, the more certain you can be that the next crisis will be quite different, and will come from some other quarter than US real estate, and western banks.} 

_{The big question is China, because China’s sustained growth was the other reason that we didn’t have a Great Depression.  If China hadn’t done huge credit creation, we, I think, would have had a much tougher time globally.  It was the stimulus package that worked.  The result of China’s great crisis-fighting policies is a very high level of debt.} 

_{The emergence, in China, of some of the pathologies that we recognised in the West ten years ago, shadow banking, real estate bubbles-, and you have to ask yourself, as the IMF did just the other day, are China’s big banks well enough capitalised to cope with what would happen if there were, suddenly, a downturn in the real estate market?} 

_{So, China’s the place to watch.  Of course, economists have predicted nine out of the last zero Chinese financial collapses.  So, I’m not about to add to the list of failed predictions, but I do think it would be much more likely to be China than the United States that is the epicentre of the next crisis, simply because China’s debt level is so high.}