What is the new Black Swan for the Global Economy?

The Black Swans are not only circling the global economy, they are in the uber on their way to your home…

• Markets entered a perilous new phase in the past week, one in which statistically unusual moves across asset classes are becoming commonplace.
• Surging volatility in what are supposed to be among the safest fixed income instruments in the world could disrupt the financial system’s plumbing, according to Mark Connors, former Credit Suisse global head of risk advisory.
• That could force the Fed to prop up the Treasury market, he said. Doing so will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule.
• The other worry is that the whipsawing markets will expose the weak hands among asset managers, hedge funds and other players who may have been overleveraged or took on unwise risks. Margin calls and forced liquidations could further roil markets.

In his must read book ‘Crisis’ former Reserve Bank Governor Alan Bollard recounts a meeting at Davos where a very smart financial expert was asking all the Reserve Bank Governors in the room who owned the debt in a credit default swap.

When everyone in the room realised they had no idea who  owns the debt, they all gulped.

Shortly after that, credit default swaps crashed the entire global economy.

No one knew what these complex financial instruments were actually doing or how hollow and corrupt they had become until they melted down.

Since then we have printed $25Trillion in quantitive easing artificially creating the lowest interest rates in 5000 years. The global supply chains pushing deep into the must de-unionised parts of China subdued all the inflation, but Covid, the massive drought impacting agricultural calendar and the war in Ukraine has caused supply side shocks that are causing hyper inflationary pressures Reserve Banks can’t contain.

The danger is the the size of the debt has become so destabilisingly huge that any attempt to increase interest rates will create an event horizon of a black hole of debt that the entire global economy could be dragged into.

The insane decision by the UK Government to implement borrowed tax cuts spooked the market so much so that the BoE had to restart their quantitive easing program by buying the 30 year Gilt to stop a cascading financial disaster from unfolding.

The fear is that some of the ‘plumbing’ of global finance between banks won’t cope if there is some massive tension in the system that ruptures.

The geopolitical tensions alongside climate change damaging crop yields are making us poorer, more hungry and angry.

The nervousness in that room at Davos when Allan Bollard first heard about credit default swaps hangs over the entire global markets as reserve banks desperately attempt to jam the inflation Genie back into its bottle.

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