In our first post of 2015, we thought we’d look forward (slightly “tongue in cheek”) to some topics which we see as remaining significant in 2015. In doing so, the opening line of Dickens’ A Tale of Two Cities comes to mind: “It was the best of times, it was the worst of times”- not because we believe that we are in the midst of another Great Recession, or “irrational exuberance”, but because the “market” seems to swing from expectations that the global economy is beginning to recover (led by that of the US), to concerns that the number of negative factors will stop economic growth in its tracks (as in Euro-sclerosis or a “Grexit”).
Certainly, there are enough factors that grab the headlines to induce pessimism, and drive the dismal scientists and PRI analysts further into their cups, but focusing always on the negative, because “bad news sells”, is just as irrational as being an unreasoning optimist and ignoring the risks that do exist.
Of course, at Awbury, being battle-hardened and scarred by past crises and business downcycles, we tend to err on the side of looking for the worst outcome in any particular transaction; but that is simply because we need to do so in order to make rational judgments about risk vs. reward; to be comfortable that we understand the tail risks; and that they can be properly managed and mitigated.
Here’s is our short “sampler” of topics that still need bearing in mind:
- The Fourth Russian Revolution: the Russian Bear, in the macho but decaying form of the Russian President, remains at bay; beset by enemies on all sides; unloved and “misunderstood” The regime relies on corruption, extortion, nationalism and hydrocarbon revenues to maintain control, but demographics and economics are against it. Brittle regimes can suddenly collapse if a cowed population loses its fear. The problem in this case is that the Bear controls a nuclear arsenal and its military doctrine is becoming more open to the their use for “tactical” reasons. One of the more interesting tail risks;
- Cyber-paranoia: as the recent Sony “hack” and serial and sundry embarrassments of both banks and corporates demonstrate, cyber-malignancy is now endemic and increasingly dangerous. (Re)insurance companies are turning intellectual somersaults trying to work out whether, and if so what to cover. Time to go back to pen and ink?
- Whipsawed by the Fed: Define the meaning of “patient”…As usual a central bank is trying to signal with being too obvious what its near term intentions are. Certainly the markets continue to expect some form of interest rate rise by Q3 of 2015. However, the question is: will they still be “shocked” when it actually happens?
- Oh! The pain, the pain… Where’s the Excedrin?: while, in certain jurisdictions, banks may be clawing back some influence over policy-making, the list of further forms of capital and balance sheet constraints keeps growing, as does the one of mind-numbing acronyms such as BRRD, TLAC, MREL and NSFR. Being a banker is definitely not fun for most, but provides opportunity for Awbury, as demand for our range of products increases;
- Cash; who wants it? Or the Return of the Mattress: increasingly a supposedly “safe” asset is becoming a wasting one (inflation aside), because governments and banks are, for various reasons imposing penalties on those who have the temerity to try to store it in electronic form. Perhaps we should invest in mattress safes?
- Any old iron…? Or, over a barrel: First it was gold, then the prices of iron ore and of natural gas (primarily in North America); now it is crude oil. Many commodity prices have experienced significant price declines, with the 50%+ drop in the price of crude oil in recent months causing pain not only at the corporate, but also at the sovereign level, as government budgets, many of which were already based on fantasy prices, are now in a shambles. Those producing countries (think Saudi Arabia in particular) which have the greatest financial capacity are, contrary to “precedent” allowing prices to find their own levels, being willing to send the weak to the wall. This has potentially significant knock-on effects in behaviour that will require close monitoring.
Happy New Year!!
-The Awbury Team