With markets primed for a reversal, here are five events that could trigger a 2020-21 financial crisis

While the trade war and possibility of a global recession remain concerns, a liquidity crisis in which everyone wants to redeem their debt at the same time – such as severe problems in a major economy like China – is what we should fear most

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Trader Peter Tuchman wears 2020 glasses to celebrate the New Year at the New York Stock Exchange on Tuesday. Photo: Reuters

Published: 1:00am, 3 Jan 2020Updated: 3:17am, 3 Jan 2020

To quote former US defence secretary Donald Rumsfeld: “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

The markets are now priced to perfection. We saw rises of 40 per cent in the Chinese domestic market, 34 per cent on Nasdaq, 29 per cent on the S&P 500, 25 per cent in Europe, 18 per cent in Japan, 15 per cent in India and 12 per cent in Hong Kong. Bonds did well, as did gold up 16 per cent, unusual in strong securities and dollar markets of low volatility. Such a market is pregnant with a reversal.

And yet a big fall in the near term seems unlikely because of the inauthentic confidence generated by the sugar rush of liquidity given to markets by central banks in 2019. This push from the authorities is likely to continue to inflate asset prices in early 2020.

Central bankers have spent their ammunition but national governments, including China, Germany and Britain, are increasing deficit spending on low interest rates like there is no tomorrow. The traditional new year sport in the US is for Congress or the president to refuse to sign off on a record budget – no such games this year. More vodka in the punch bowl.

Speaker of the US House of Representatives Nancy Pelosi gestures after signing a US$328 billion spending bill to prevent another government shutdown, in Washington last February. Photo: EPA-EFE

So what? If the debt can be serviced, what’s the problem? The answer lies in Rumsfeld’s concept. The market cares not about the knowns, as these can be priced in. It is the “unknown unknowns” that collapse the house of cards.