We are grateful for the many hundreds of detailed responses we have
received to our key question from distinguished ATCA 5000 members
worldwide -- including parliamentarians, central bankers and
regulators, chairmen, chief executives, partners, principals,
government officials, wealth managers and investors, technologists and
academics, as well as press corps -- in regard to :
"Are the markets about to crash? Given the apparent ineffectiveness of
QE2 reflected in treasury yields; Eurozone crisis coming to a slow
boil; and US and China at loggerheads at G20... What are your views?"
Since we posed the direct question last week to 5,000 ATCA members and
1,000 Philanthropia members on Friday 12th November, based on alarms
set off by our computer models suggesting high volatility ahead:
1. The China market has fallen by more than 10%;
2. Commodities including oil and gold have lost around 6%;
3. Many emerging markets like India have fallen by more than 4%;
4. The Western markets have fallen by around 2.5%; and
5. The US dollar has risen by around 3.5% against the euro.
These developments are consistent with the mi2g Intelligence Unit
(mIU) and ATCA Research and Analysis Wing (A-RAW) computer model of
financial markets and world trade, especially as the markets begin to
gravitate away from speculation towards underlying economic
fundamentals. What could turn these down swings into a full blown
financial crash that leads to an exacerbated second phase of the
global financial crisis? We note that the first phase of the The Great
Unwind involving financial deleveraging, which began in August 2007,
and The Great Reset in world trade, which began in September 2008,
have not yet had an opportunity to come to any conclusion via the
necessary catharsis. There is tremendous debt or leverage in the
private sector and public sector which needs to be deleveraged and
there is a massive imbalance between spare capacity on the supply side
and significantly reduced demand.
Key Questions: What could trigger the next financial crisis as a
result of another massive market crash? How important will it be?
What will be the consequences?
The collective response of distinguished ATCA members suggests the pre-
requisite for such an event to be the simultaneous manifestation of a
low probability high impact event, an "unknown unknown" or black swan
and for that matter, a perfectly white swan, that the markets have
failed to take into account because of their day-trading myopia.
Possible trigger events are exemplified in the following list derived
from communications received from distinguished ATCA members:
. Unemployment rates continues to increase or stubbornly remains
above a critical limit?
. Food and fuel inflation increases to the point that household
consumption is crimped and costs to businesses eliminate
profitability?
. Failure to address and to solve critical problems while pursuing
measures to mitigate economic pain and to diffuse public responses to
crises?
. Eurozone falls apart? Franco-German tension rises? North-South
antagonism increases within Europe?
. Stagnation or resumed contraction in world trade?
. Computer driven High Frequency Trading (HFT) causes a major flash
crash across world markets?
. An advanced financial cyber attack takes place with impact across a
range of critical services and markets?
. An organisation manipulates the market by triggering an event that
causes an extreme market swing?
. Advanced computing and globalisation risks escalate above a
critical limit in a world of extreme inequality?
. Panic responses of investors and citizens to growing levels of debt
of one or more nation state(s)?
. Disruptive technology causes security algorithms to become
redundant?
. Contagion rises as an isolated, yet prominent, case of banking
insolvency rapidly triggers multiple insolvencies like Credit Anstalt
in 1931?
. Mortgage foreclosure black holes cause collapse of asset backed
securities and insolvency of financial institutions?
. Large additional steep declines in commercial and residential
property values?
. Mortgage backed assets lose significant further value?
. One or more financial trader mistakes on the scale of Barings?
. Blow up in derivatives market with large scale withdrawal of
counter parties?
. Nation states enact laws or decrees to shield their own
corporations from the negative effects of derivatives contracts that
blow up?
. Multiple bubble bursts amongst emerging markets?
. Escalation of currency dispute -- particularly between the US and
China -- potentially degenerating into broader economic and
geopolitical conflict(s)?
. China, Japan and other sovereign investors stop buying US debt and
begin dumping it?
. Escalation of differences between the US and the rest of the G20 to
the point where positions become entrenched and irreconcilable?
. Critical world players walk away from global poker game leaving
massive gaps in market liquidity and straining market functionality?
. Current economic downturn fails to respond to the recent
Quantitative Easing or QE2 and disappointment evolves into renewed
economic slump?
. OPEC stops selling oil in dollars?
. World abandons one currency as the world reserve currency but
without coordinated agreement on appropriate alternatives?
. Breakdown of trust among principal players makes restoration of
trust impossible, resulting in systemic breakdown?
. Geo-political conflict escalates: new military action involving
China, North Korea, Iran and/or the US, or breakout of large scale
extremism or action by “irregular” forces?
. Revival of historic territorial disputes to the point of open
conflict?
. New extremist acts or natural events that are on the scale of 9/11
or the Icelandic volcano eruption stop air travel over many countries
for a long period?
. Intelligent terrorism leads to blended attacks across multiple
domains simultaneously?
. Extreme climate chaos caused by a number of factors including
heightened solar activity leads to electronic disruption, flash floods
or drought?
. Dirty bomb in one or more major financial centres?
. Very fast spreading pandemic goes out of control?
. Major accidents or events that stop the flow of a single rare but
vital commodity?
. Single accidents -- like the Gulf of Mexico oil leak -- that
paralyse an industry such as sea food and tourism?
. Major natural disaster like a tsunami that hits a populated coast
of a major country?
. Extreme political or religious movement that gains strong
acceptance like the Nazis in the 1930s?
. Severe droughts that put large populations at risk of famine and
encourage violent response to secure food supplies?
. Systemic risk manifests because of the crash of the whole financial
system as we know it today?
. Search for extra terrestrial intelligence yields results which are
not benign?
There is an extremely large menu of extremely disruptive low
probablity high impact events which carry a high element of surprise
and this is not a comprehensive list.
Conclusion
Some distinguished ATCA members have suggested that there is simply
too much liquidity thanks to low interest rates, QE1, QE2, etc, in the
financial system for a crash to occur. It is not going to be in
anyone's interest to allow any sovereign nation state, major
corporation or financial institution with a trans-national remit to
collapse. So long as no black swans or "unknown unknowns" come along,
we may just be able to cope as a global community of nations working
together. It is understood that governments across the world are
continuing to do their best to avoid a financial crash.
As a senior European parliamentarian said recently, "Are we heading
slowly, but so far surely, back to the 1930s?" At times, the world
oligopoly of economic powers feels very fragile and delicately held
together. Yet we must remember how fundamentally dynamic human beings
are and their capacity to recover from virtually any crisis. They just
keep innovating to stay ahead of the last, or next, big problem.
However, the real fear is that if any mainstream economy goes off the
rails the impact will not remain within the economic sphere but rather
will take on a social dimension as in the 1930s. Empty stomachs lead
to political extremism and all of the consequences which follow, so
one can only hope that anyone mindful of triggering a collapse by wild
financial speculation and short term profit motives recognises the
much bigger consequences of their narrowly focused actions.
Although fundamentals point towards global slowdown we might be
fortunate to experience a soft landing. Let us hope that this is the
case, whilst preparing for the eventualities of "What could trigger
the next financial crash?" We will shortly be hosting an exclusive
roundtable in Canary Wharf, London, to look at these issues in
detail. If you would like to take part please let us know.
[ENDS]
In order to maintain membership it is essential to provide feedback
regularly. We welcome your thoughts, observations and views. To
reflect further on this, please respond within Twitter, Linked and
Facebook's ATCA Open and related Socratic dialogue platform of HQR.
All the best
DK Matai
Chairman and Founder:
mi2g.net, ATCA, The Philanthropia, HQR, @G140
To connect directly with:
. DK Matai:
http://twitter.com/DKMatai
. Open HQR:
http://twitter.com/OpenHQR
. ATCA Open:
http://twitter.com/ATCAOpen
. @G140:
http://twitter.com/G140
. mi2g:
http://twitter.com/intunit
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