Insurance meltdown: Why this could be the catalyst for the next financial crisis?

Respected macroeconomic researcher, Ian Harnett, has revealed the industry he believes could tip the western world into the next financial crisis.

Harnett is the founder and chief investment officer of Absolute Strategy Research, an independent macroeconomic research firm that provides forecasts and analysis to some of the world’s largest hedge funds.

In a new podcast discussion, Harnett said embedded risk within the insurance industry in western economies is a key black swan event being overlooked by investors and economists.

“This is something that I think that the central banks and the supernational authorities have realized that they have overlooked as well, is that insurance companies do have a lot of risk in them,” said Harnett.

“They have a lot of embedded leverage and as we saw with the UK LDI (liquid driven investment) crisis… insurance companies could be the main amplifiers of risk in any financial crisis.

“In a way, actually they were in the GFC. So I think if there’s something that people are overlooking, it’s the moment we’ve had the crypto sell off, we’ve had buy now, pay later, we’ve had the mortgage originators, we’ve had the small regional banks, I think it could be the insurers that are next.”

China key to avoiding looming US recession

In the rare interview, Harnett also labelled the chance of the US avoiding a recession in the coming 12 months as “vanishingly small”.

“I still very much believe that we are still looking at a world that is going into recession… whether that’s in the US or in the bulk of the Anglo-Saxon economies,” he said.

“The bottom line is that the monetary policy has been tightened over the last 18 months in terms of interest rates, but we are also seeing the quantitative tightening coming through as central banks limit the access to credit.

“Quite honestly, the credit crunch hadn’t yet started, and the lags in our models are pointing to the fact that that’s really just about to kick in in a number of economies.”

But he said the one saving grace could be additional liquidity from China.

Many are tipping the Chinese government will soon embark on a major stimulus program to bolster the country’s stagnating economy.

“Last year was about the cost of capital, this year will be about the quantity of capital. So if we were to see a big injection of liquidity, and I think that’s what’s actually saved these markets in the first half of the year.

“We had a big injection of liquidity from the BOGJ (Japan) around the beginning of the year, about 900 billion as they tried to keep yield curve control in place. Then we had the PBOC (China) inject around about 600 billion for around the turn of the year. We had SVB lead to the bank term funding program that added liquidity. And then the debt crisis in America, well, as the treasury ran down their general account, that actually injected liquidity in the markets.

“So we’ve had a series of things that have held these markets up, liquidity driven markets. Those are now stopping. But if we saw a new source of liquidity come into the market, and that is probably a big dose of Chinese liquidity is the most likely source of that, then I think we would have to get a bit more optimistic about the outlook for the markets, even if not necessarily for the real economy in the short term.”

“Typically when you get a big liquidity injection, particularly from somewhere like China, it tends to ease pressure in the global currency markets, global liquidity markets. Financial conditions ease and economic conditions tend to stabilize or improve as well. So that for me, that’s the thing that I am most concerned about.

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