The world today sits upon a very precarious point. Today’s tipping point is unlike most yet, extremely similar to a select few. Those “few” are the one’s usually reserved and noted in the old analogy of “The straw that broke the camel’s back.”
What makes these different from most are two things. First: It’s realized as well as scrutinized by a growing chorus that indeed things are not well and on the verge of not just failing, but falling apart all together in complete and utter catastrophe. The second: To many observers before, and after the fact it’s clear – all it will take (or took) is just the slightest of increments to bring it about. This is why one should pay close attention when this analogy fits the circumstances. For they portend outright total disaster – not some measured or partial one.
This isn’t a conversation about fear mongering or any of the such. This is about understanding where we might be within a given reflexive point based on empirical observations as well as an understanding of the true possibilities that may play out, and how that may affect or disrupt any business both large and small in the near future.
Some will say, “they don’t have time to pay attention to such things.” Or, “they’ll cross that bridge when they get to it.” The problem is as I’ve explained many times, “What happens when you find there is no bridge? That it’s gone. Now what?” I’m sorry, but if you’re in business: not having an informed understanding of macro events as well as micro, and how they can possibly disrupt or wreak havoc on your business, is inexcusable for anyone who takes business seriously. Period. e.g., A port strike on one coast (or in another country) can cause product or food shortages on the other. In a “just in time” inventory supplied world. Everything is now weekly if not daily dependent. Forget monthly.
So with that said here we sit just days away from the Federal Reserve’s decision on whether to raise interest rates or not. The anticipated implications for stock market volatility has never been higher. And where it goes – nobody knows. It’s all guessing.
Yet, based on common sense observations; weight has to side on the market reacting negatively. How much so will be in a matter of degrees with the potential for outright pandemonium as witnessed in August when all the major index futures were halted before the opening. Why? Because the Fed’s decision is exponentially more connected to global carry trades and others that are holding up the markets. Again – globally.
We witnessed how precarious China’s market (which is #2) was to the slightest of changes and the spill over effect that washed ashore here. This time – it’s the #1 market. How the reversing of over 100 months of no hikes will be met once again is anyone’s guess.
One thing that’s not a “guess” is the way nations or economies have dealt with economic turmoil. History is far too littered with varying forms of “war” as not only the response, but also as the direct consequence of failed economic policies. Either of their own making or brought about by another. It doesn’t matter whether self-inflicted or not. The end game is the same: Currency war, Trade war, Diplomatic war, right down to actual combative kinetic war. e.g. WW1, WW2, etc.
Why “It’s not different this time” is like so many others in history It’s where economic upheaval that turns into political unrest breeds the perfect situation where tyrants, dictators, and others of that ilk routinely look for scapegoats as to direct the public’s ire away from their own ineptitude, and focus it elsewhere. And a Fed. raising interest rates that could further send these teetering economies into outright free-fall and disarray could be the very thing (or excuse) needed for conspicuous consumption and deflection.
Right now as I type this not only is China throwing everything it has including the kitchen sink at its stock market and economy desperately trying to hold it all from falling off the precipice entirely. So too is the entire emerging market arena. And what is the primary tool they are using? Cutting rates, and devaluing their currency.
What could (or would?) all but seal their fate for outright calamity? A hiking of U.S. interest rates which in turn would surely cause the Dollar to rise, as well as pull scared investment dollars out of those struggling economies right into U.S. based “safe” asset vehicles.
The Federal Reserve would be doing precisely, as well as solely, the exact opposite of what most of the world is doing. While at the same time possibly setting up for a massive heave of capital outflows crippling already embattled emerging markets both in their stock markets, currency, exports, right down to their political. It’s a situation made for a Hollywood movie yet it’s not a movie this time – it’s all a real possibility with gargantuan consequences.
Last year I wrote an article titled “Will History Record The Ending Of QE As An Archduke Moment?” In that article I posited the idea that with the upcoming ending of QE and the distortions it had created throughout the financial markets globally, that one needed to pay very careful attention to tensions as well as reaction with a far more focused eye than at any time previous, for the implications and their resulting conclusions could have truly catastrophic outcomes. Here are a few excerpts from that article.
“Nothing rallies a nation faster than the threat of an enemy. And nothing serves a political class born of dictators than using any and every tool at their disposal as to rally the glaring eyes of political unrest and affix it to another as to release their ire. And what better straw-man has the world offered the tyrannical powers of the world at large than the interventionist monetary policies of the Federal Reserve via their QE program.”
“One can’t help but find the timing hauntingly coincidental that Vladimir Putin decided the window of opportunity to make his move on former parts of the Soviet Union was in near unison with the Fed. Revelations that in fact QE was being wound down. i.e., In February when the announcement of the 2nd $10 Billion dollar reduction made manifest that in fact the QE wind down was on schedule. (A schedule many across the financial media said wouldn’t happen.) Now economies such as Russia and others would find themselves once again at the center of any political unrest, while simultaneously being economically hamstrung screamed opportunity to use it to their advantage with Machiavelli inspired actions.
Tag onto this that other land mass with far more people to cast political upheaval than Putin has to contend with: China.
Suddenly the economy touted as “the” economy that will save us all is not only slowing, it’s contracting at a pace far more quickened as a direct result of QE being pulled.”
And where do we find ourselves today?
Over the last few weeks not only has China for the first time in history sent warships off the coast of Alaska in an obvious showing of “Hey, nice place you have here. It would be horrible if anything ever happened to it.” But so too did Russia within the same time period. Oh yeah, all at the same time the President toured it for the first time ever by a sitting president. All coincidence we’re asked to accept. Sure it is.
Now there’s the ever-growing Syrian escalation crisis. Refugees are now fleeing into Europe at such a pace old world means of border enforcement not seen since the fall of Eastern Europe are being not only revitalized, but implemented at Blitzkrieg speeds reminiscent of WW2. Armed military checkpoints behind walls of razor-wire are being constructed and deployed over hundreds of miles within days.
China supported U.S. agitator N.Korea is once again openly threatening U.S. interests. Russia? They’ve now moved heavy arms and soldiers directly into Syria in what can only be taken as an “in your face” move.
Russia and China have publicly announced as well as propagated a means as to circumvent Dollar denominated trade and clearing measures with their own. And many of the emerging markets that will be thrown into chaos with a Federal Reserve mandate of a rate hike are far more aligned with these two countries than the U.S. A conflict of any magnitude would be just what the
dictator doctor ordered to suspend any or all protocols of settlement demands.
Europe is right now contending with utter chaos within, as well as, its surrounding borders throughout the Zone. The EZ is made up of countries, not states as in the U.S. Political, as well as social fears, become a tinderbox ripe for flash-points with the breaking of; as well as the forging of new alliances that can happen in what seems as mere moments; as opposed to a time where people have breathing room and can think clearly. Rash decisions usually get made out of frustration. Sometimes with disastrous consequences.
The outbreak for WW1 from the incident in Sarajevo took a mere month. And that was in response to a direct assassination. It’s now been a little under a year since the ending of QE and many have been outright vocal in their accusations that the Federal Reserve has their economies directly in their cross-hairs as to bolster U.S. hegemony. And one would not be too far off the mark if looking at the current disruptions as well as fore-footing of military arm flexing and parading of weaponry being flexed by countries directly effected in obvious ways via the capital markets and central bank policies that a precipice may in fact have been reached – with onerous resolutions at the waiting.
Surveying the global landscape regardless of one’s political views or leanings along with weighing the possibilities for either any obvious business disruptions, as well as possible long-term interruptions, whether one is a sole practitioner or CEO of a global concern is a must, and needs to be included right alongside any other calculations that may come with an interest rake hike. Even if that hike (right now the consensus is for .25 basis points) in the scheme of things appears inconsequential. For that is exactly my point.
When one views the global landscape both politically as well as economically with an eye of understanding through the old adage of, “History doesn’t usually repeat, but it sure does rhyme.” We are at an extraordinarily precarious moment in time.
Things can go in any direction. And yes, even all the above can be for not and we rocket back towards “everything is awesome” land filled with rainbows and soon to be IPO’s unicorns. However, I must state again, although it is possible – it’s still all up in the air in a coin toss like state. We can only wait, react, then watch and see how it all plays out. For right now the most truthful of the known is: Nobody knows.
Yet, one thing is clear. Many are either looking or won’t look till they see an event large enough to peak their interest for concern, for only then do they feel is it the proper time for concern. However, it is the diligent that doesn’t rely on hubris or laziness as to not be inquisitive about what is happening around them and think about possible scenarios. Along with how they might deal with them and how it might affect their families, businesses, employees, suppliers, et al before hand. Not after the fact. For that may be too late.
Remember, why the camel analogy might suit all the above so fittingly is just for that reason: A 100lb. bag of straw vs 1 single stem produces the same effect. And all we’re talking about here is a raising of 1/4 of 1%.
Has so much weight on world markets ever been so close to the edge – for so little?
© 2015 Mark St.Cyr