Eiswert jokingly admitted he recently realised that even he – the child of a coal mining town in America’s Appalachian region – had become a global elite.

“I hate myself!” he laughs. “We’re sick of experts, we are sick of global elites.”

That this discontent helped win the Brexit vote, and helped elect Donald Trump, isn’t exactly a new theory.

Spark for the next great crash

But Eiswert argues that this social anger, and its political consequences, could prove to be the spark that causes the next great market cash.

“Right now, it’s Goldilocks, it’s just right,” he says of current market conditions, with the Federal Reserve and other central banks taking a more dovish view of the world.

“But the bears are going to eat her eventually.”

Eiswert says the story of last year’s violent correction was a tale of the market underestimating the underlying fragility in the world.

China’s efforts to stimulate the economy in 2016 were followed by the election of Trump, who set a fire under the US economy with tax cuts.

Central banks thought they could normalise rates, but it quickly became apparent they couldn’t.

“There is so much vulnerability to rising rates in the global economy,” Eiswert argues.

“People got carried away not understanding the difference between structural growth and fiscal stimulus, and now we are back to a low-growth world.”

However, the underlying fragility hasn’t gone away, sowing the seeds for disaster down the track.

“I think in general there’s too much debt, there’s too much oil and there’s too much automation,” he says.

“As people chase yield in the next two years, we will get to a level of debt where we won’t be able to avoid a crisis.”

Unhappiness and politics

The tougher question is, what sends rates higher and sparks the next crisis?

Typically, it would be rising inflation, but that’s not happening due to technology. To provide two examples, Eiswert points to oil prices (which should rise as the economy heats, but are not because of the supply unlocked by fracking) and technology costs (which are being held down by the move to cloud computing).

A commodity shock could be a trigger, but that looks unlikely for the reason above. A war could send rates higher, but hopefully that’s unlikely too.

Which brings us back to unhappiness and politics.

If the Democrats were to win the next presidential election and push ahead with policy changes such as very high taxes on the wealthy or big-spending welfare, those bears might just start sensing a chance to chomp on Goldilocks.

Of course, these politically-driven market shocks create opportunities, too. Eiswert is investing in beaten-down real estate investment trusts in London, betting that once Brexit passes, the lack of new building in recent years will see demand outstrip supply.

As for this year, Eiswert says it feels like the same people who panicked in December are panicking now, and buying stocks.

He won’t be surprised to see a pullback some time this year, but argues that many investors who fled equities in late 2018 might be yet to wade back in.

When the market was up 5 per cent, these investors would have held firm. At 10 per cent and 15 per cent, they’d be equally stubborn.

But when the market is up 20 per cent, they’ll be all in, Eiswert hypothesises.

James Thomson

j.thomson@afr.com

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