JPMorgan's global research chief breaks down 4 huge shifts that will make the next financial crisis unlike any in history - and explains why the best-known safeguards won't work

Screenshot/CNBC

• The world has undergone four paradigm shifts that make it difficult to use old playbooks to gauge the next financial crisis, according to Joyce Chang, the global head of research at JPMorgan.
• The biggest of the four is a shift in market structure, which is setting up financial markets for what JPMorgan has already dubbed the great liquidity crisis.
• In an exclusive interview with Business Insider, Chang explained why geopolitical risk has also changed significantly, and the well-known hedges that would be ineffective for the next crisis.

Joyce Chang has witnessed her fair share of financial crises during the nearly three decades she has worked in markets.

Chang, the global head of research at JPMorgan, isn't applying any of the old playbooks to the next one, which she says is inevitable.

The good news is that the next recession is not imminent, according to JPMorgan. The firm's internal probabilities place the odds of a recession in the US to 50% by 2020.

Chang says the world will be a completely different place than it was during some of the worst crises in recent history, and argues that many of these changes have already taken place.

To that end, she's outlined four "paradigm shifts" that investors should keep in mind when thinking about the triggers for the next financial crisis. They're discussed in detail below.

"All these things make it very difficult to say that past cycles are necessarily the best gauge for what will happen next," Chang told Business Insider in an exclusive interview.

1. A shift in market liquidity, structure, and function

Chang describes this theme as the biggest change in financial markets.

The market caps of assets in global bonds and exchange-traded funds have ballooned since 2008. However, liquidity, which Chang described as market cap as a share of trading volume, has fallen by as much as 70% over the same period. This helps explain many of the flash crashes which have occurred in the interim, and how they seem to be happening over shorter timeframes.

She noted that, for example, the Chinese yuan devaluation scare that shook US stocks in 2015 played out over about 60 days, peak to trough. The Brexit-related sell-off played out over roughly five days. The Italian referendum earlier this year rocked markets for about a day.

"This is my 29th year in the market," Chang said. "You used to have time for a recommendation to play out, and the time compression has really moved as the market has become more electronic."

This paradigm shift further manifests itself in the high frequency with which investors need data. For example, JPMorgan constructed a Trade War Index based on over 7,000 earnings reports for an instant look at where the risks to stocks lie.

"When I started in research, it was before the internet, so things were actually physically mailed to people, Chang said. "We would, for our top clients, actually FedEx it to them so they would get it more quickly."

Obviously those days are long gone.

2. The global political system is shifting away from multilateralism and towards a multi-polar order.

Simply put, this means there's less cooperation among countries and more inward-looking policies that prioritize citizens. The UK's decision to forge its future outside the European Union is an example of this shift. But perhaps the poster-child of this approach is President Donald Trump and his America-first agenda, which has been used to justify the trade disputes with China and other allies.

Where investors are concerned, Chang says such policies have raised the pass through from geopolitical events to markets.

"The conventional wisdom that it's more noise than trend is true," Chang said. "But if you look at causes of the recession, it often comes with an oil shock which is triggered in part by geopolitical risk."

She's also observed that more companies are discussing the impact of geopolitics is having on their earnings.

JPMorgan found that geopolitical events had a strong negative impact on US, emerging-market, and global equity indexes. Chang recommends shorting equities as one of the best hedges for geopolitical risk, as well as going long the dollar and volatility.

However, contrary to popular belief, gold is not an effective hedge as political shocks tend to impact all commodities negatively. The Japanese yen also provided little protection against losses.

Ultimately, as geopolitical risks rise, investors will need to know the most effective hedges for their portfolios.

3. The rise of populism

From the US to Brazil and Mexico, anti-establishment candidates are coming out of the woodwork and winning presidential elections.

It's a trend that stems from the rise of income inequality following the Great Financial Crisis, Chang said. But the crisis is not the only thing that has worsened income inequality. Financial markets deregulation and increases in technology have also created winners and losers and crushed the middle class.

For these reasons, populism is poised to become a feature of geopolitics rather than a bug, Chang said.

4. A reshaping of the US-China relationship

The brewing trade war between both countries is just one of the issues that will matter to investors as the next crisis approaches.

China's ambitions to build infrastructure in other countries, its use of artificial intelligence, and its dispute over the South China Sea are some of the other possible triggers for geopolitical turmoil.