Commentary: Financial markets beware. The white swans of 2020 are coming home to roost

NEW YORK CITY: In February, I warned that any number of foreseeable crises – “white swans” – could trigger a massive global disturbance this year. I noted that:

The US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.




Since February, the COVID-19 outbreak in China did indeed explode into a pandemic, vindicating those of us who warned early on that the coronavirus would have severe consequences for the global economy.

Owing to massive stimulus policies, the Greater Recession of 2020 has not become a Greater Depression.

But the global economy remains fragile, and even if a V-shaped recovery from highly depressed output and demand were to occur, it might last for only a quarter or two, given the low level of economic activity.



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Alternatively, with so much uncertainty, risk aversion and deleveraging on the part of corporations, households, and even entire countries could result in a more anemic U-shaped recovery over time.

But if the recent surge of COVID-19 cases in the United States and other countries is not controlled, and if a second wave occurs this fall and winter before a safe and effective vaccine is discovered, the economy would likely experience a W-shaped double-dip recession.

And with such deep fragilities in the global economy, one cannot rule out an L-shaped Greater Depression by the middle of the decade.

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Some global companies are considering shifting treasury operations out of Hong Kong as the United States ends the city's trade privileges. (File photo: AFP/Isaac Lawrence)


Moreover, as I predicted in February, the rivalry between the US and four revisionist powers – China, Russia, Iran, and North Korea – has accelerated in the run-up to Novembers US presidential election.

There is growing concern that these countries are using cyber warfare to interfere with the election and deepen Americas partisan divisions.

A close outcome will almost certainly lead to accusations (by either side) of “election-rigging,” and potentially to civil disorder.

The COVID-19 crisis has also severely exacerbated the Sino-American cold war regarding trade, technology, data, investment, and currency matters. Geopolitical tensions are escalating dangerously in Hong Kong, Taiwan, and the East and South China Seas.

Even if neither China nor the US wants a military confrontation, increased brinkmanship could lead to a military accident that spins out of control. My warning in February that the Sino-American cold war could turn hot has become more salient since then.

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In the Middle East, I expected that Iran would escalate tensions with the US and its allies – especially Israel and Saudi Arabia.

But, given Trumps increasingly evident weakness in the polls, the Iranians have evidently opted for a policy of relative restraint, in the hope that a victory for Joe Biden will lead the US to rejoin the 2015 nuclear deal and loosen US sanctions.

But, sensing that its strategic window is closing, Israel has reportedly been launching covert attacks on a range of Iranian military and nuclear targets (presumably with the Trump administrations tacit support). As a result, talk of Middle East-related “October surprise” is increasing.

An image grab shows the dummy carrier being encircled by speedboats of Iran's Revolutionary Guards. (Photo: AFP)

I also raised concerns that the Trump administration might use sanctions to seize and freeze Chinas, Russias, and other rivals US Treasury holdings, prompting a sell-off of Treasuries as these countries shift to a geopolitically safer asset like gold.

This fear, together with the risk that large monetised fiscal deficits will stoke inflation, has since caused a spike in gold prices, which have risen by 23 per cent this year, and by more than 50 per cent since late 2018.

The US is indeed weaponising the greenback, which has recently weakened as US rivals and allies alike seek to diversify away from dollar-denominated assets.


Environmental concerns are also mounting. In East Africa, desertification has created ideal conditions for biblical-scale locust swarms that are destroying crops and livelihoods.

Recent research suggests that crop failures due to rising temperatures and desertification will drRead More – Source