The Financial Crisis in 2008 was the trigger event that made me revaluate pretty much everything that I had been told about economics, finance and geopolitics. Essentially, what I was being told differed from what my observations were. Since that time the disparity has grown immensely as it pertains to the manufactured consensus versus reality.
Last night I was scanning through the latest European Central Bank’s ‘Financial Stability Review’ paper. In the Foreword of the review Vítor Constâncio, VP of the ECB, wrote that; “Systemic risk can best be described as the risk that the provision of necessary financial products and services by the financial system will be impaired to a point where economic growth and welfare may be materially affected. Systemic risk can derive from three sources: an endogenous build-up of financial imbalances, possibly associated with a booming financial cycle; large aggregate shocks hitting the economy or the financial system; or contagion effects across markets, intermediaries or infrastructures.”
Endogenous (having an internal cause) build up of financial imbalances. - Check - We have had an insane build up of financial imbalances. Two examples come to mind: Debt and entitlement benefits. (both of which are unsustainable and are causing havoc globally) I think the positive statement about “being caused by a booming economy” is misleading because the shocks have come from underperforming economies and perpetual debt issues that many nations are dealing with.
Large aggregate shocks hitting to the economy or financial system. - Check - The hits have been too numerous to mention within this missive, but here are a number of examples: Greek debt crisis, Brexit vote, derivatives contagion between Deutsche Bank and Banca Monte dei Paschim di Siena SpA (causing both banks share prices to collapse and multiple government bailouts of the Italian bank with the likelihood of a German government bailout of Deutsche Bank), Japanese monetary and fiscal policy failures, bank bailouts, deficits,…
* Contagion effects across markets, intermediaries or infrastructures. - Check - I think this is a major issue that is being completely misunderstood and in fact becoming downright dangerous. I highly recommend this 19 minute video with Nassim Nicholas Taleb (at the 13 minute mark in the video many examples are discussed and it highlights my concern). The European Union is destined to fail because of the disconnect between the bureaucrats in Brussels and the citizens of each uniquely different country that make up the EU.
There is no denying the instability caused by debt, deficits, underemployment, resource depletion, ecological damage, social unrest, war and so on. The more drastic policy makers decisions are the more likelihood for contagion.
As mentioned numerous times over the past months; the global populace is growing uneasy and leaders are now enacting policies to try to soothe the masses with ideals that will bring about the desired changes. The changing of the guard, so to speak, via moving form the status quo to ‘fringe’ leaders will more than likely lead to further degradation of our societies, economies, governments, financial markets and in many other areas.
As mentioned in last week’s missive: “for every action, there is an equal and opposite reaction” - Newton’s third law. Donald Trump is looking to make significant changes in an effort to ‘Make America Great Again’. (I could have used the policies of any government for this example) “Hopeism" has taken over and the financial markets are spiking higher as if Donald Trump’s policies have already been a success and that the good times are back. What has changed? (Nothing) If he cancels TPP, rewrites NAFTA, builds a wall, targets the Chinese currency and trade flow, runs massive deficits by increasing military and infrastructure spending and lowers taxes; will this make America great again? What made America great in the first place? Please check out this short clip from The Newsroom "America is not the greatest country in the world anymore”
One of the largest revelations from the aftermath of the US election and the Brexit vote has to do with the media. The mainstream media tried to create a desired outcome rather than reporting objectively. ‘Official’ polls in both cases had lead us to believe that Hillary Clinton would win the presidential election and that UK citizens would vote to remain in the EU.
Last week, I mentioned that Marine Le Pen will likely win the support of French citizens. On Wednesday November 16th, the Independent reported; “Marine Le Pen unlikely to win France presidential election, say pollsters”.
A mere four days later the Independent reported; “Marine Le Pen takes huge lead over Nicolas Sarkozy in French first round presidential election poll”.
Anyone who is not an ‘establishment’ politician is labeled ‘Far-Right’, ‘Fascist’ or other buzz terms that play on peoples emotions. The status quo is being contested as the global populace becomes more and more disenfranchised with the direction political leaders are taking them. Geopolitical risks are increasing by the day and this will spill over into the financial markets.
I understand why people do not like too much reality. Most of what has been highlighted in this missive can be construed as negative, scary, complex and hard to understand. Whether we take a 30,000 ft view of the world or look under a microscope and study the innards of a cell - life is complex. Our day to day lives are enough to consume our attention let alone worrying about macro-economics and geopolitics.
The reality of it all is that we are in the midst of major change. The balance of power is shifting from the West to East, governments are in turmoil, populations are disgruntled, ecological issues are growing and the financial markets do not reflect the underlying sea change. Change is one of the only constants in life. Awareness allows us to learn, think critically and subsequently make informed decisions as to how we carry ourselves on a day to day basis.