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Ten years after the worst financial catastrophe since the Great Crash of 1929, there are more differences with the post-Crash decade than similarities. That may not be apparent amid the chaos in our politics or the global geopolitical and trade tensions, but the contrasts couldn’t be more stark, and for that we should be thankful.

A decade after 1929, the world had not emerged fully from the Great Depression; unemployment, while down from a peak of 25%, was still 17%. The Dow Jones Industrial Average was triple its low of 1932, but was about half of its peak and wouldn’t reclaim its 1929 levels for a quarter-century.

Now, unemployment has fallen from double digits to under 4%, the stock market has more than recovered its bear market losses, and while the world isn’t exactly at peace, neither is it at outright war.

Yet, with the approach of the 10th anniversary of the failure of Lehman Brothers and the near-meltdown of the world’s financial system, the memory is still raw. Rather than being confident, or even complacent, many top investment minds are more consumed by what could cause the next crisis.

“This time is different” is often the most dangerous phrase heard at the peak of bull markets, but to Felix Zulauf, the longtime member of the Barron’s Roundtable and head of Zulauf Asset Management in Baar, Switzerland, every crisis is different from the previous one.

“Different” certainly describes U.S. politics, but the drama in D.C. that dominates the news these days isn’t what concerns the markets. Neither do the escalating tensions over trade and tariffs, at least not yet. The widespread presumption is that the U.S. and its major trading partners, especially China, won’t allow the disputes to escalate to a full-scale trade war, as in the Great Depression.

What the markets fret about most is the withdrawal of the unprecedented medicine provided by central banks in the form of trillions of dollars’ worth of liquidity, which has inflated asset values and spurred the long but slow recovery of major economies.

Indeed, after initially failing to either appreciate the approaching crisis in 2007-08 or respond adequately, policy makers seemed to learn from the 1930s; they tried to do the opposite of what policy makers did back then. Most specifically, by adopting quantitative easing—enormous central bank purchases of securities with money created out of thin air—the Federal Reserve, the European Central Bank, and the Bank of Japan, plus other major central banks, avoided what economists Milton Friedman and Anna J. Schwartz deemed the key policy blunder of the Great Depression of letting the money supply contract.

QE has worked, insofar as financial assets are concerned. As then–Fed Chairman Ben Bernanke explained after the central bank instituted the second phase of its securities purchases, QE was supposed to lower interest rates on mortgages and corporate bonds to spur housing and capital investment. That would encourage higher stock prices, which would boost consumers’ wealth and confidence, and thus spur spending, and in turn incomes and profits.

Of all those aims, the Fed has hit its target most squarely in the stock market. According to Wilshire Associates, U.S. equity values have increased by $27.8 trillion, or 337%, since the stock market’s low in March 2009, which came within days of the Fed’s stepped-up QE. According to Yardeni Research, a chart of the rise in the combined balance sheets of the Fed, ECB, and BOJ, from roughly $4 trillion in 2008 to a peak of $15 trillion in early 2018, was closely paralleled by the rise in the S&P 500.

That’s now changing. Since last October, the Fed has proceeded as promised in shrinking its balance sheet, reducing its assets by $252 billion. And as Peter Boockvar, chief investment officer at Bleakley Advisory Group, points out, the net purchases of the Fed, ECB, and BOJ will go from the equivalent of $100 billion a month in the fourth quarter of 2017 to zero starting in this year’s fourth quarter.

“A crisis usually begins when money gets tight,” Zulauf writes in an email. “While the Fed’s balance sheet inflation since 2009 has inflated all sorts of asset prices, the serious reduction of its balance sheet should have just the opposite effect, namely to deflate asset prices.”

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The strains are beginning to be felt in the weakest links of the global financial system: the emerging markets, primarily Turkey, Argentina, and South Africa.

Other points of strain are also appearing overseas, notably in Italy, says Mark J. Grant, chief global strategist at B. Riley FBR, who warned early on of Greece’s debt crisis. The budget from Italy’s coalition of far right and populist parties is due later this month, “and I think that is when the fireworks begin,” he says, possibly putting the entire European Union in jeopardy. Then there is the omnipresent concern over China’s opaque and highly indebted financial system.

But the real bubble inflated by the central banks has been in supposedly safe government and corporate bonds, Boockvar of the Bleakley Advisory Group contends. The damage will become apparent in the next 12 to 24 months as they move from QE to QT, or quantitative tightening. That, in turn, will damage an overly indebted world economy.

The bond bubble has helped to inflate the stock market, writes former Dallas Fed advisor Danielle DiMartino Booth in her Money Strong weekly note. In the last five years, U.S. corporations have taken advantage of low yields to sell $9.2 trillion of bonds, which have helped fund $3.5 trillion in repurchases, and are on pace for a record $850 billion in stock buybacks in 2018.

Leverage has permeated the economy. Booth cites Bank of America Merrill Lynch chief investment strategist Michael Hartnett who ticks off a litany: “share buybacks with borrowed money is leverage, private equity is leveraged equity portfolios, tax cuts financed with Treasurys is leverage. ”

Jason DeSena Trennert, who heads Strategas Research Partners, points to private equity as the sector that has been inflated the most. Public retirement funds’ average assumed return is 7.6%, far above what a balanced portfolio of bonds and stocks is likely to provide, so these funds and endowments have flocked to PE to try to reach that probably unattainable bogey. As a result, there are billions of dollars looking for the next Uber or Slack.

Pensions are at the top of the worry list of Stephanie Pomboy, who heads MacroMavens and was farsighted in seeing housing triggering the last crisis. The $4 trillion in unfunded public pension liabilities dwarfs the $500 billion in underwater housing that helped set off the great financial crisis. A hit to risk assets would only deepen the pensions’ hole, and could necessitate a bailout that could make QE “look like rounding error,” she says.

“When the repricing begins, the rise of ‘quants,’ as well as passive strategies and ETF vehicles, will amplify the downturn many times over,” she adds. That view was echoed last week by JPMorgan quantitative strategist Marko Kolanovic.

“The shift from active to passive management, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” he writes in a research report. That was the result of some $2 trillion of assets shifting from active and value strategies to passive and momentum-following strategies. The aforementioned shift to such nonpublic assets as PE, real estate, and illiquid credit instruments further reduces the pool of cash available to the public markets, he adds.

The result, Kolanovic writes, could include the rise in populism, protectionism, and trade wars, whose market impacts may simply be delayed. Ultimately, “the next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968.” In the subsequent decade, the global financial order broke down, inflation soared, and stocks produced zero returns.

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Fed Chairman Jerome Powell pointed out recently that the last two recessions followed financial market excesses rather than inflation, which in previous cycles led to Fed tightening and then economic downturns. Does that mean he will continue the steady-as-she-goes normalization of the Fed’s balance sheet and its interest rates, even if it means some deflation of asset prices?

Or does Powell dare not risk a decline in asset prices? BofA ML’s Hartnett writes, “Wall Street deflation, rather than Main Street inflation, is the quickest route to recession (see Japan, Europe, China).” An economic downturn could have further-reaching political and social impacts, as Kolanovic suggests.

The Fed’s balance sheet shrinkage could end because of a growing global crisis, or the U.S. economy slows and inflation fears abate, Zulauf concludes. At that point, he says, asset prices could be quite a bit lower. “And then one needs cash to benefit and buy whatever you like cheaper,” he concludes. That’s the good side of a crisis, for those who come through it.

Write to Randall W. Forsyth at randall.forsyth@barrons.com