The 2nd Half of 2016: Nationalism & Political (In)stability

It’s a beautiful, blue skied Saturday morning where I am. Yet I can’t shake off a general sense of unease I’m feeling… It’s not the Turkey coup situation or the French mass murders (on Thursday) alone… for me, it’s a (growing) pattern of incidents I loosely see as symptomatic of the rise of nationalism and political instability.

The fruit of my labor is not a result of merely my own labor

It almost feels wrong to be enjoying life, and living in a land that is so abundant (relatively) in peace and prosperity, while my fellow human being suffers so much. I did not choose where I was born; I did not choose WHEN in history I was born; I did not choose my parents, the household  conditions…and so on, and so forth. No one has. It seems quite unfair that all these characteristics - that I had no control over - account for most of who and where I am today. Yes, I have worked hard (sometimes). Yes, I have been smart/skillful (less than sometimes). But who am I kidding? My success is not merely my own - it is the sum result of many factors, most of which I had no control over.

And so I find it difficult to be enjoying myself when so many other human beings - fellow brothers and sisters of the human race - are suffering for reasons beyond their own decisions.

I have actually felt this sense of unease for the last 5-6 years…I would occasionally tell friends that I fear that a good portion of our remaining adult lives may be filled with far more human tragedy. That we face high risk of war, that the peace/tranquility we Americans have been blessed with for the last 30 years is not the norm, at least from the vantagepoint of human history.  A certain financial/political researcher I follow correctly anticipated the rise of political instability / war risk, specifically pointing to 2015 Q3 as the beginning of a cycle.

Being right does not bring comfort. I hope I am wrong.

Growing Unease, Nationalism, Political Instability and Financial Markets

I feel almost wrong thinking about how this growing unease impacts financial markets. Should I not mourn for those in suffering? Perhaps. But in times like these, I also feel a responsibility to live life abundantly - to live life with a sense of gratitude, purpose and meaning.

it seems the best way to honor the deceased and the suffering.

The sum result on financial markets is not immediately clear, especially as it relates to US financial markets. What is clear(er) to me is the growing importance of global macro, or at least understanding how global macro impacts one’s investment strategy. Specifically, I will be surprised if the following are NOT true, going forward:

• (Continued) Record-breaking bi-directional macro volatility
• Confusing, inconsistent, and sometimes outright non-sensical correlations between headline political instability/violence versus financial markets price activity

The 9/11 Risk

A friend of mine who has been a global macro speculator since the mid 1990s considered 9/11 far scarier than 2008. 2008, at least from a global macro perspective (in his view), was predictable. 9/11, as it pertains to financial markets implications, was not.

Another friend (an ancient whose career precedes the macro friend’s by more than a decade) described October 1987 in similar terms - he was not sure if his fund’s positions would clear that week. He feared that his brokers/banks would fail.

Perhaps Brexit was that for us in 2016 (except that it was a very well broadcasted event). Or perhaps Brexit is a sneak preview.

Either way, here are the implications I see:

• 9/11 and October 1987 are not predictable. Outright positioning for one seems a waste of time and capital. Mental preparation for one seems a good use of time.
• Their impacts on medium/long term fundamentals and financial market trajectory afterwards is similarly unpredictable.
• Namely, 9/11 eventually was followed by recession/equity bubble crash. 1987, on the other hand, was a blip in the continued US bull market. Bottom-line: the 9/11, 1987 risk is not long-term bullish or bearish for risk assets.

 

2016 so far has been quite the year of statistically significant price action:

• All-time highs in the quantity of negative yielding bonds. All-time lows in interest rates, record-breaking YTD capital appreciation.
• Greatest GBP one day decline in history.
• The S&P500 and USTs tested record highs and lows (yields) respectively on the same day…for the first time in history.
• multi strategy hedge fund performance - see January/February period.
• Various records broken in rapid changes in volatility.
• Top 1-3 peak to trough declines in oil (through late January).
• Greatest one-day decline in Spanish equity market history

I expect the 2nd half of 2016 to continue with record breaking market activity.