May 07
20
Building Risk Into the Equation
I have been concerned for the last year that the world is really heading into a major recession. Too much money being printed, too many people with their fingers in the pie….
But friends have also convinced me that the US, as the engine of the global economy, will continue to positively grow – at least up until the next Presidential election. That makes quite a good deal of sense to me.
However, I was reading Stephen Roach's weekly essay this morning – this one on the fact that the markets are not building enough risk into their models for the consequences of the US introducing trade barriers for Chinese goods. If the US introduced some kind of protectionism to try to win some domestic votes, they could cause the entire global economy to unwind with a very nasty bump!
more delicately, do I really have a better read than the markets on
what the US Congress is up to? My answer is that it is not an
either/or proposition. This is not a case of the binary outcome –
globalization or protectionism. Instead, it is much more about
probabilistic risk assessments of a wide range of possible outcomes.
With the help of our team of market strategists, the way I read the
broad consensus of investor sentiment right now is that virtually no
risk is being assigned to a protectionist endgame. My experience in
Washington over the past three months – three separate appearances in
front of the Congress and considerable consultation with congressional
and Administration senior staffers – leads me to conclude that this
risk assessment is far too sanguine. I continue to think that there is
a 60% chance that a WTO-compliant bill aimed at curbing the trade
deficit with
will be passed by a veto-proof majority in both houses of Congress by
the end of this year. Even if I am wrong by a factor of two, for my
money, the markets are still far too relaxed on this key issue.