Event Risk is Back

Event Risk is Back

As we chomp down on turkey and pie for a uniquely American holiday, we would be forgiven for ignoring the slow-motion undermining of many geopolitical truths of the post-WW2 era. To name a few:

  • Spurred on by Brexit and the election of Donald Trump, the global world order is losing favor; so-called nationalist movements have arisen across Europe
  • The traditional US role in the Middle East is changing – the US-Saudi relationship is at an inflection point and Russia has reasserted itself as a Middle Eastern power, forging an unlikely alliance with Turkey and Iran, while playing some role in the atrocious Syrian civil war
  • US-China economic relations are at a tipping point; military posturing is increasing
  • Major European powers are signaling interest in a European Union army, foreshadowing the end of NATO, perhaps in 2021, the 72-year anniversary of its founding

Western Leaders in Turmoil

Perhaps unsurprisingly, the four largest economies in the Western Hemisphere, the US, UK, Germany, and France (representing ~36% of global GDP) are enduring this year’s version of seemingly annual political crises:

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US Dollar Has Rallied in 2018

Against this backdrop of global instability, the US Dollar (USD) has staged an unexpected 2018 rally.

2018 US Dollar Index Price (source: macrotrends.com)

USD strength has put further pressure on the global economy, particularly on emerging markets countries who issue significant dollar-denominated debt (servicing costs rise when the USD rises) and are often dependent on commodity exports (commodity prices, typically priced in USD, tend to fall when the USD rises).

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Event Risk From a Miscalculated Public Sector Move Is Very High.

The various events described above could resolve themselves in an orderly fashion. Tariff talk could disappear, a US-China trade agreement could materialize, Western leaders could survive current turmoil, and the Middle East could simmer down. But as I have written before, our dominant public sector systems are in a state of multi-year nonequilibrium, starting in late-2015, expected to last through 2032. During this time, humanity will place greater faith in private enterprise (e.g., corporations, military, religious/cultural institutions), rejecting our existing public systems (e.g., governments, multilateral organizations). However, the public sector remains powerful and is likely to produce the greatest shocks of this era, such as the Russian invasion of Syria, Brexit, the 2016 election of President Trump, the nationalist rise in Europe, etc. During periods of non-equilibrium, systems are at risk of an unexpected, shock event that can define the system more intensively than the combined impact of prior smaller events. This feels like one of those moments.

Market Action

A couple of weeks ago, I highlighted November 21 as an inflection point for markets based on a variety of time cycle theories (e.g., Kondratiev). A raft of US economic indicators will be released that day, including Weekly Jobless Claims, Durable Goods Orders, Core Capex Orders, Existing Home Sales, Consumer Sentiment, and Leading Economic Indicators. This data will provide insight into whether recent market volatility is foreshadowing an economic slowdown.

US Stocks pulled back from the midterms election gain last week. To the delight, I am sure, of Wall Street technicians, the S&P 500 turned back down right around the October 17th high, a likely important resistance level. Stocks did rally Thursday and Friday reacting, ostensibly, to positive US-China headlines from President Trump and US Trade Representative Robert Lightizer. However, they remained below their widely-followed 200-day moving averages. The Early Warning Signal for a major turn in US Stocks remains in effect.

Crude Oil continued its decline, with WTI Crude falling 4.7% last week . Supply and demand are playing a role here, with US crude oil inventories up for 8 straight weeks. The last time inventories were at this level, 12/1/17, continuous Crude Oil futures closed at 57.39. They closed at 57.03 on Friday. Price has memory. The path of least resistance in Oil is further downward.

Despite volatility in equities, Gold has not risen with any strength, and is in fact down 6% YTD. This is possibly due to USD strength, the currency Gold is typically priced in. Gold may continue to remain weak and fall, despite growing economic risks.

I am beginning to wonder if Stocks, Oil, and Gold can ALL fall in concert, while the US Dollar continues to rise. The risk of a global event furthering this market action is quite high right now.


Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.