As Risks Rise – So Seems Market Confidence. What gives? (#277)

Global tensions and adverse developments are at an all time high. Yet, except for brief pullbacks the major stock markets, especially USA’s, seem to take all the global business and political setbacks in stride, and almost immediately return to their positive territory. This upward repeating action does not reflect the current global economic reality, but as in the recent past, it seems to extend the undefeatable attitude of the full-on ‘Quantitative Easing’ (QE) times when the Federal Reserve and the other Central Banks had their backs.

The markets seem to be convinced that regardless of the gathering storm of grim economic realities, Trump and the hard-pressed Federal Reserve, along with the embattled government and Central Bank of China, simply will not allow serious market declines, and will counter any, with strong monetary support.

On the face of it, it seems like a reasonable assumption, but risks are gathering throughout the World like a cloud of ‘Black Swans’.

So far in the U.K., Brexit has been a verifiable disaster for Briton and the EU, with no actionable plan in sight and with nothing to show for three years of intense effort on the part of the British government except internal political acrimony and division. This has caused huge and debilitating uncertainty for the British public, and for all of the UK’s business community.

This inability to exit or stay, by the British, has caused great confusion and uncertainty in the EU, along with emboldening the Far Right political movements to launch their own divisive quests for power, based on protectionist sentiments of race and cultural purity, along with nationalistic political isolationism. The recent disruptive rise of the Far Right political parties, threaten the fragile unity of the EU with negative long term ramifications for Europe and the World.

More famously (in terms of daily attention grabbing potential) the US and China trade war is escalating into a possible extended war of attrition, with both sides, Trump’s America and Xi’s China, claiming acute discrimination from the other side, with equal calls of more consideration and restraint.

As mutual mistrust of the other is not the desired environment for a possible trade deal any time soon, the US and China trade war is posing ever-greater threat to global economic stability with no near-term resolution in sight.

In fact, both Trump and Xi are hardening their national stance, with Trump publicly bragging about the superior economic position of America which will force China to concede first, and Xi invoking the suffering and sacrifice of the Chinese people under Mao ZeDong’s revolution, epitomized by the iconic ‘Long March’, thus hinting at a long period of struggle against America.

Such blatant politicization of trade issues make for uncertain outcomes. In Trump and Xi are two leaders that have cultivated their internal political positions as the promoters of their respective country’s national interest above all else. Such a stance makes it difficult to compromise without losing face and serious political capital, which neither leader is willing to do for obvious reasons; which in turn means, that any agreement on mutually acceptable terms seems unlikely any time soon, which should cause greater anxiety then it seems to causing currently.

In America, more trouble is brewing with the battles between Trump and Congress escalating. The various investigations into Trump and family activities are closing in and the war of words and actions between the two branches of government are now open pitched battles, heading for the courts.

One could say that America is now in full constitutional crisis. And, in these strange times of daily crisis and outrageous events, even constitutional crisis seems to be just another development in this bizarre age of the ‘new normal’.

Then there is the Trump and his team banging of the war drums, and this time they beat for Iran, though they seem to have been quieted somewhat recently.

But Trump’s erratic and at times extremely damaging foreign policies have pushed Iran, Syria, Afghanistan, North Korea, Cuba and Venezuela firmly into seeking shelter and succor from the other two global military ‘Super-Powers’, Russia and China. And that regrouping has created the closest thing to the divided World of the ‘Cold War’ days with the accompanying nuclear arms race revitalized. But this time the ‘Cold War’ is with advanced technological attachment, to reflect our modern times, of full out cyber warfare that is on 24/7. One assumes that both sides are attacking the other, with intentions to disrupt and destroy the other’s key institutions and systems that can then trigger the greatest levels of disruption (America and the EU, now being cases in point, as victims of Russia’s incredibly successful recent cyber warfare strategies.)

In spite of such growing threats of global business disruption, slowing global economy, rising geo-political animosities, revitalized nuclear arms race, and serious general social and political volatility, along with the daily increasing odds of the next recession, the global financial markets seem relatively sanguine.

So what gives?

It would seem that market experts believe that the risks associated with the above mentioned negative outcomes have now been priced in, and that since no real catastrophe actually took place as those events unfolded, the major risks are therefore behind them. Additionally, they are betting that any potential for a resolution to one or more of the above listed risks will force the markets upwards (a melt-up), with a boost to overall optimism.

So generally, the ‘risk-on’ mood is dominating and mitigating any real and prolonged sell-offs and panics. To us it seems this sentiment seems a tad too positive, too prematurely, given all the negatives and uncertainties that are still actively festering out there and are unresolved, with some that are still growing.

And then the real threat is that one of the black swans swirling overhead actually lands. With all the challenges being kept-up like spinning plates, just one as to spin out of control, wobble and crash, and in the chaotic shoot-from-the-hip era of Trump, with his less than the ‘Be-Best people’ administration, it is difficult to have any confidence that a full blown crisis will be handled optimally, mitigated and diffused in time. But the markets seem only fixated on the next possible interest rate drop from the Fed, and perhaps, if their dreams really come true another round of QE if things deteriorate, and in this environment any and all possible crisis are seen as a trigger for more support from the Fed and CBs, and that is the irrational addiction to easy money of the ‘free markets’, at its most dangerous.