Comparing Old And New Realities

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Black swans and the economy

Black swans and the economy

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  • 1. Comparing Old and New Realities: Are We Going Forward to the Past?
  • 2. Past causes of megaconflict
    • Economic volatility
    • Ethnic disintegration
    • Empire(s) in decline
    • Eastern resurgence
  • 3. 1. Economic volatility
  • 4. 2. Ethnic disintegration
  • 5. 3. Empires in decline
  • 6. 4. Eastern resurgence
  • 7. Future causes of megaconflict?
    • Middle East volatility?
    • Ethnic meltdown in Iraq
    • US empire in decline?
    • Iran and China advance
  • 8. 1. No shortage of vol. in ME Source: World Bank
  • 9. 2. Iraq: Insurgency to civil war Source: Brookings
  • 10. 3. America’s overstretched ‘empire’
  • 11. 4. The descent of the West Source: Goldman Sachs NB US/China per capita income ratio forecast to fall from 23 to 6
  • 12. So where’s the financial fear? Source: MSCI NB Of BRICs + N-11 (15), 9 are in the bottom third of the world as ranked by the Global Peace Index, and 3 are in the bottom 10.
  • 13. Where’s the political risk premium?
  • 14. Are we being fooled by liquidity?
  • 15. … and the joy of “Chimerica”?
  • 16.  
  • 17. Have we been here before?
  • 18. Long-term rates were low …
  • 19. Credit spreads narrowed … “ The Sterling Carry Trade”
  • 20. Stock markets trended upwards
  • 21. … and volatility declined
  • 22. —despite rising energy prices
  • 23. British savings c/w Asian today
  • 24. But then … The Times , July 22, 1914, p. 19 (Note: Assassination of Franz Ferdinand June 28)
  • 25. August 1, 1914 The Times , August 1, 1914, p. 13 (Note: Britain declares war on Germany, August 4)
  • 26. What might have happened? London reopens: January 4, 1915
  • 27. What did happen
  • 28. Emergency markets
  • 29. The price of imperial decline? Source: Global Financial Data
  • 30. Looks familiar?
  • 31. The big problem
    • A “low probability, high-impact event” like a major war (or revolution) is less improbable than we assume …
    • But like all “black swans” it’s impossible to predict with any accuracy …
    • So it’s easier to ignore, because if it happens we’ll all go down together
  • 32. That’s no bell curve
  • 33. That’s no bell curve
  • 34. The limits of history
    • I can’t promise you a Third (or Fourth) World War
      • The First World War was unexpected
      • The Second World War was expected, but came later than investors feared
      • The Third World War was expected, but didn’t happen (or only in the Third World)
      • A Great Middle Eastern War is more likely today than a World War
    • I can’t advise you on the optimal wartime portfolio, so don’t ask
  • 35. The limits of history
    • I can’t promise you a Third (or Fourth) World War
      • The First World War was unexpected
      • The Second World War was expected, but came later than investors feared
      • The Third World War was expected, but didn’t happen (or only in the Third World)
      • A Great Middle Eastern War is more likely today than a World War
    • I can’t advise you on the optimal wartime portfolio, so don’t ask
  • 36. Conclusion: They do exist © Niall Ferguson 2007