By Christian Takushi MA UZH, 7 Aug 2017 – Switzerland.
In this post we point to a a very vulnerable geopolitical global landscape during this Fall 2017, but also to a resilient real economy as some positive secondary scenarios are gathering pace.
Policy Makers may have become a major Systemic Risk to the for Human Kind. They’ve made our world extremely vulnerable to simultaneous external shocks: the overlap of multiple geopolitical trends during 2017-2024. During the next 7 years the world is more vulnerable than usual to external shocks and the overlap of geopolitical trends. During August-September 2017 the likelihood of a Risk Event is particularly high, but this does not mean that a Crisis is imperative – a trigger is necessary and hard to forecast.
Last week we notified our clients of the higher risks and elevated system vulnerability that lies ahead. Given this geopolitical and macro assessment we see risk assets – specially those with extended valuations – as vulnerable from 10 Aug to 30 Sep 2017. Normality is expected to set in during October. Some investors have considered reducing exposure to equities and other risk assets, in order to increase exposure to Cash, Volatility (VIX) and Gold. But not every investor can or should do that. We also see the currency market as less predictable than in prior years, but the Swiss Franc and USD may get excess demand during that period. Should a risk event occur, the USD will benefit from the flight to US Treasuries while the Swiss Franc may benefit less. It could benefit from its old safe heaven status – specially if the YEN is impaired by the tensions on the Korean peninsula.
A key Safe Heaven is gradually fading away
Long term the Swiss Franc’s safe heaven role has been diminished by Bern’s smart “slow-motion entry” into the EU, through the back door. The bilateral agreements are an ever bigger straight-jacket on the once independent Swiss state – eroding the safety premium the CHF used to enjoy. But markets are slow to catch up with geopolitical realities; they do so late and often suddenly. Switzerland is de facto no longer the independent neutral state it used to be; it has to look towards Brussels for any important decision. Thus, the Swiss Franc is in a secular convergence towards the EURO, while at the same time more exposed to Safe Heaven demand in case of geopolitical/systemic risks. This means less premium and prolonged reduced volatility, but with recurrent & intermittent surges in volatility.
Central banks, policy makers and governments have orchestrated a somewhat artificial massive recovery in asset prices since 2009, producing massive asset inflation. They punished conservative investors, drove down volatilities and interfered with aggregate demand/supply. But they may have overdone it. Over the past 12 months they are talking about “Tightening”, but in reality they have pumped another USD 1.8 Trillion in liquidity. An era of deception? Let us not point fingers; many institutional and private investors close their eyes. There is no more “balance & checks”: the interests of policy makers, banks, investors and media have become extremely aligned with one another. Observers say “as long as there is no Inflation, no problem”. That is naive and deceitful. Asset Inflation is rampant, and Consumer Inflation is NOT the only thing that drives interest rates or that matters in a complex global economy. Specially when it is measured & tweaked by policy makers too (i.e. not an independent agency – interest collusion). There is plenty of inflation out there in the system and other type of events could send food-energy prices and interest rates soaring. Fact is, a massive asset inflation and credit bubble has been built. Just look at China shadow credit, real estate or US/European subprime car loans. Can human kind forget the lessons of 2008 so quickly, yes. Fear and greed are pulling this time in the same direction. Nevertheless, as a former Fund Manager I always warn investors not to underestimate the resolve of policy makers.
Let us also not forget that while the geopolitical and monetary system are vulnerable, the real economy is not only robust, but for the most part resilient.
Central banks a source of systemic risk?
Sadly and partly due to the political stalemate in Washington, Brussels and Tokyo, the more control policy makers can exercise over asset prices, yields and volatilities the further they take it. Policy makers have created the largest excess liquidity bubble and credit bubble ever just at a time when we are also experiencing the largest Arms Race ever. And to every crisis they throw yet more liquidity or invent a new unorthodox tool to control demand & supply in ever more markets. Governments from the EU to China are controlling their economies and surveilling their citizens like seldom before – thanks to rampant imported terrorism they can get away with that. It is the era of convergence: For the first time since WW2 there is not a great difference in the amount of factual Free Speech in Europe or totalitarian regimes like China or Iran. The means are different, but they world is converging on multiple levels.
But in their excessive focus on economic and financial data, policy makers have overlooked the tremendous overlap of diverse major global geopolitical trends during 2017-2024. Our analysis shows several periods of high friction at meta levels, or local maxima. Thus, I feel 2017-2024 could be a great time for investors with strategic foresight and tactical trading capabilities.
But let us be fair, we cannot placed all responsibility for the vulnerable monetary system on our central banks. Monetary policy makers were forced to act, because the Political Process in key economies in the world is in disarray. Political leaders inability to implement structural reforms left central banks as the solution of last resort. Elected leaders’ top priority is popularity and re-election, postponing tough measures into the future. Sadly, this vicious cycle is weakening both democracy and the capitalistic market economy.
The long term Big Picture
The first high friction phase can be expected from 10 August to 30 September 2017. I am talking about the overlap of developments in the geopolitical, military, religious, astronomic and natural realms just at a time when our global monetary system is highly vulnerable. Some of those events have been awaited for decades by Oriental religious and political leaders. Policy makers won’t be able to control the kind of events that will visit and revisit our planet over the next 7 years. And frankly speaking they will welcome them, because the only way for governments like the EU to concentrate more power is via CRISES. Multiple or cascading crises will overwhelm individual nations, allowing Brussels to act as saviour in exchange for the transfer of sovereign powers to a central federal state. While many predicted the end of the EU in 2015-2016 I have vehemently warned about the rise of Super States, of which a European Federation is likely to be the first one. That means the EU is only the platform for what is coming, a much more powerful European Super State with draconian powers. Big businesses, the UN and established parties want it. As I have said before: Democracy and Capitalism are fading away – and that is a non-emotional analysis. Independent observers fret that the political process has been hijacked by established parties, that giant oligopolies drive legislation and that the press has been taken over by political interests. I stay away from ideological judgement – My job is to analyse, look ahead and help my clients to be ready for impending change that consensus is missing. Emotions aside: ever bigger oligopolies have destroyed atomistic competition, the very essence of market capitalism. The regenerating power of the economy has been replaced by the oligopolistic cartels policy makers have nurtured. A major Currency Reform (a nicer word for debt default, just like QE for legalised printing of money) and a Wealth Transfer could be postponed, but they are unlikely to be avoided.
No wonder, consensus is overlooking the risks and changes ahead. Why? Because consensus, media, policy expectations and market portfolios are sitting on the same boat (with interests aligned) – they have also become increasingly kind of auto-correlated. On example: Because policy makers have a tight reign over asset markets, investors have grown immune or careless about growing geopolitical and political risks. After all implied volatilities tell them the world is just fine. Even if not in denial, investors don’t want policy makers to take the painful steps to address the structural issues. A sluggish economy with ever more monetary overdoses serves them well. Add to it borrowing money at zero rates to buy back your company shares and you have the recipe for a bull market.
My long term Outlook has not changed greatly since 2014
While most people in Europe have been overwhelmed by fears of an impending collapse of the EURO and EU, I have been warning of the exact opposite. Even if the EU and EURO should break down, they will serve as the stepping stone of massive economic & political power concentration. A European Super State is coming. That is the reason why between December 2016 and April 2017 I was one of the few economists and geopolitical analysts expecting a shift to the liberal Left by France and Germany in 2017. Consensus in Europe was overwhelmingly worried about the shift to the Far Right in both nations and subsequently the EU.
Over the past 7 years I have been warning and pointing decision makers to the ongoing economic convergence, and recently about the unfolding political convergence which has joined the first process. I expect that process to be well advanced between 2022 and 2024. After that social-religious-cultural convergence will be pushed forward as the logical next step. That means a unifying culture will be spread by mass & social media at a speed we probably never saw before. This is the longer term pattern of the Great Convergence I have been addressing at many speeches in recent years:
1st phase: Economic convergence from 1998 to 2008 – responding to the Asian Crisis and the Tech Bubble burst
2nd phase: Economic & Political Convergence from 2009 to 2024 – responding to the Great Financial Crisis ( we are in the midst of it, and that explains the tremendous opposition that new governments in the UK and the USA are getting from almost other major economy and multilateral organisation (UN, EU, OECD etc.)
A 3rd phase is likely to follow a major conflict and is likely to include some kind of convergence between major world religions.
A general call for cautious optimism
Given the extraordinary risk-adjusted gains in equities over the past 9 years, I advise my readers to pause & reflect upon their investment strategies, risk tolerance and business-investment goals. Also about their lives as a whole, because more likely than wars and unprecedented natural events is that Big Changes lie ahead.
Nevertheless, I also warn against excessive pessimism. Too many geopolitical & political analysts and even religious leaders see only doom and gloom. I don’t agree with such a univariate outlook of negativity. One of the reasons many political and geopolitical experts are invariably pessimistic for the future is that they overlook the gathering strength of the world economy, the many possible technological breakthroughs in the coming years and the co-existence of parallel scenarios. There are always possible positive scenarios ahead of us: even in 2017 and 2018. Those scenarios might be secondary and subsidiary to the current main scenario for now, but probabilities can change. Every responsible economic and geopolitical/political forecaster has to continually question his or her main scenario (main forecast), and be able to drop it if new evidence suggests so. Thus, even if our world is vulnerable and there are multiple imminent risks, a major crisis is not a “must”. Such a global event needs a trigger, and such a thing is hard to predict.
There is a valid concern that too many forecasters are focusing all their evidence-gathering to support their already established view or outlook of the world or their opponents. What they see and comment is true, but they unfortunately screen away facts that oppose their view. Sadly, both established institutions (i.e. media, universities, think tanks etc.) and alternative news blogs are resorting to a similar pattern of selective observation. They all have their well-meaning goals, but they are advancing a narrative.
Another reason for optimism is that even if the world is in a secular or structural process of deterioration, a limited period of improvement is not only possible, but also likely. It has happened before in human history. Complex processes do not evolve in a straight line. As I have said before, the world economy is much more resilient than people acknowledge. Free markets tend to adjust and re-engineer themselves. It is often the intervention of policy makers that distorts prices and Terms of Trade, laying the ground for massive economic failures. The US government tampering with the housing market combined with extremely loose monetary policy led to the Sub-prime* disaster. Governments have also promoted Big Firms and allowed them to become huge oligopolies – that has eroded competition and the capitalistic free market fibre. The capitalistic Free Market economy is based on atomistic competition; meaning no competitor is dominant and all competitors are price-takers. Thus, I am convinced that the world economy would be even healthier, more adaptable and growing faster today if governments had not “advantaged” the formation of oligopolies at the expense of small and mid-sized firms. The amazing thing is that despite our governments’ preference for oligopolistic markets and reduced competition, the World Economy is the bright spot in an otherwise gloomy Big Picture.
Barring a new negative development, readers should be encouraged by the fact that in a time when the political process and media have become extremely ideological and belligerent, the economy is a major bright spot in today’s world.
Last but not least, no reader should take any action without consulting a professional investment adviser first. You have to get second opinions and remember that one and the same view or advice leads to very different actions (or none) depending on a person’s investment and risk profile. And if you are married, consult with your spouse before making any decisions – Moving ahead only if you both can agree and have peace.
Christian Takushi MA UZH
Macro Economist & Geopolitical Strategist,
Switzerland – 7 August 2017 (small editions on 3 Oct 2017)
* I’m not trying to protect the financial industry – The immorality of some bankers and business people is something we should all condemn, but that immorality has always existed and by itself alone does not lead to a crisis. Our governments speak of morality and introduce ever more regulation to protect consumers. But words and laws are futile when the very monetary, interest rate, tax and economic policies of the same governments are promoting the most reckless & ambitious of business practices. With every new regulation governments are promoting big firms and stifling small businesses. They should delete two old regulations for every new one. If our governments cannot be more efficient, how can they expect the economy to be efficient?