Next crisis could look a lot like last crisis, but it’s a long way off

“The search for yield has been spread across the globe once again, and now we’re seeing it crop up again in different countries every week,” DiMartino Booth said. “You wake up and wonder who blew up today.”

Indeed, a series of mini-explosions has been happening around the world, in countries like Turkey, the Philippines and India. Currency trading has gotten increasingly volatile, sparking worries that the U.S. may import its next crisis.

“I’m concerned about the transmission mechanism,” DiMartino Booth said. “Even if the initial catalyst to set off the next downturn does not come from within the U.S. financial system, that does not mean that the U.S. financial system is not just as vulnerable as it was before to be the conduit to spread systemic risk.”

Such an event, though, seems unlikely to happen anytime soon. The countries experiencing fiscal and currency issues pose little global risk, and most central banks remain vigilant against contagion.

However, tightening financial conditions, the Fed continuing to raise rates and the sheer volume of debt instruments rising almost certainly means that while an earthquake may not be looming along the financial system’s many fault lines, tremors are almost certain.

“A lot of markets are going to reprice, but it won’t be systemic,” said Christopher Whalen, head of Whalen Global Advisors, an investment bank consultancy. “A lot of illusions will get broken, but spreads are still quite tight in the credit markets.”

In the interim, warnings about looming crises likely will get treated like the rantings of so many Chicken Littles who have been proven wrong time and again during the nine-year economic recovery. Few really believe in crises until they actually hit.

“When we talk about leveraged loans and CLOs today, sure there’s obviously a problem. Until you see a sponsor fail and file bankruptcy, then people will start to believe it, but not yet,” Whalen said. “There is a significant mispricing of risk. That will come along soon. You’re going to see prices fall a lot. But is it going to take the system down? No, unless there’s some stupidity out there that you don’t see.”