Citi's ex-head of global credit strategy thinks a financial crisis is coming
This may not be what you want to hear on Monday, but Matt King, the former global head of credit strategy at Citi, thinks a financial crisis is coming.
Get Morning Coffee ☕ in your inbox. Sign up here.
King, who was let go by Citi after 20 years' service when the bank cut people in 2023, now runs his own financial markets research and consultancy firm, Sartori Insights. Yesterday, he ran a webinar for clients outlining his reasoning.
"We seem to be rapidly moving from a risk of an economic crisis to the risk of a financial crisis," said King. The presumption is that the Fed will step in if things get really bad, but the history of emerging markets crises is that this isn't always enough, said King. "You get to a point where you've lost all credibility and where adding liquidity exacerbates the flight."
It's a bold call compared to Goldman CEO David Solomon's more sanguine observation of a "markedly different" second quarter environment with "effects at the margins" on Goldman Sachs, and even to Jamie Dimon's claim that the new post-tariff world is "a significant change we’ve never seen in our lives” for JPMorgan. However, King has form: in 2008 he famously issued a report titled 'Are Brokers Broken?' just two days before the collapse of Lehman. In more recent years, though, he's frequently warned about the excess of liquidity in the system without that risk coming to very much.
The problem right now, says King, is not the treasury basis trade, nor margin calls nor hedge fund unwinds. It's the "accumulated risk" sitting in long-only funds and the trillions that have gone into "buying the dip". - "My main concern is years of asymmetric policy, turning a blind eye to rallies in markets and coming to the rescue when markets fall. That’s created this one-sidedness, this momentum chasing and herding that's now at risk of coming undone."
The US accounts for nearly 70% of global equity market capitalization, notes King. And profits in the US look "particularly vulnerable" to recent events. They are predicated on "long value chains and gross flows," both of which are at risk from tariffs, even if they're only significant bilaterally between the US and China. Nor is clear that the Trump administration can simply row back on its recent announcements. "Attacks on trust in the system are likely to be difficult to undo," claims King, cautioning that investors who pay close attention to Stephen Miran's policy paper threatening an effective default are likely to conclude that the US is no longer a good place to invest. "Everyone is looking at dollar exposure. Everyone is thinking they've got too much."
In these circumstances, King says there's a significant risk that debt levels that once seemed tolerable no longer look like a good idea. "The golden rule about debt is that it always feels sustainable while asset prices are going up, but when they come down it suddenly doesn't feel so sustainable. - Leverage works both ways." As people panic and exit dollar investments, the house of debt could come tumbling down. "There's a real risk of this turning into a run," warns King.
Ex-hedge fund manager turned Treasury Secretary Scott Bessent would surely disagree with King's verdict. So too would Solomon and others. But ask Bridgewater founder Ray Dalio, says King: if you look across a long timeline and read his prognostications, you will "end up very depressed."
King's former Citi colleagues might also take issue with his ominous forecast. Last week, Adam Pickett, Citi's current head of global macroeconomic strategy, upgraded US stocks to overweight after Trump put ex-China tariffs on hold for 90 days. Today, however, London-based equity strategist Beata Manthey downgraded US stocks to merely neutral again.
King says he has more freedom to make quick and bold predictions now that he's not at a major bank. However, even at Citi, he says he usually "found ways to get my point across regardless, often with charts." If you're reading banking research, the charts might be the best things to watch in the months to come, particularly after Michael Cembalest at JPMorgan confessed to self-censoring his most report on the post-tariff economy.
Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, WhatsApp or voicemail). Telegram: @SarahButcher. Click here to fill in our anonymous form, or email editortips@efinancialcareers.com. Signal also available.
Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libellous (in which case it won’t.)
