The chorus of those predicting a major financial collapse sooner than later keeps growing. Until recently, those warnings came mostly from the fringe. Today, they are coming from the heart of the financial establishment.

In this article, it is Harvard professor and presidential economic adviser Martin Feldstein who sounds the alarm. Feldstein points out that if a normal recession occurred in the near future, it has the potential to expand into a full-blown liquidity crisis and financial panic because the Fed does not have the tools to turn the recession around.

Interest rates are still too low to cut enough, and the Fed’s balance sheet is still too large to expand much. The U.S. budget deficit is so high and the U.S. debt-to-equity ratio is so out of control that even fiscal policy will be constrained when it is most needed. This next crisis could produce financial losses to investors of $15 trillion or more, a higher amount than investors lost in 2008.

Feldstein is not Chicken Little. He’s one of the most highly respected mainstream economists in the world and head of the prestigious National Bureau of Economic Research, the private academic body that determines the beginning and end dates for economic recessions. If Feldstein is warning of financial panic, then the hour is late.

The time for investors to prepare with reduced allocations to stocks and larger allocations to cash is now.

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