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Six Global Risks that could Spark a New Crisis

Never before has there been such a dichotomy of opinions emerging from economistsSome predict utter chaos while others feel that government intervention will spark the next bull marketHere I will present some of the risks going forward so that we can all reflect on how much uncertainty there really is.

1) A Revisit of SmootHawley

Scenario: With U.S. unemployment at 10.2% and steadily marching higher, politicians will hear an outcry from their constituents to do something about itThat something usually comes in the form of protectionist measures including trade sanctionsMuch emphasis will be put on the Chinese Renminbi and its peg to the US Dollar.

Hedge: Gold, Silver, Swiss Franc

2) Sovereign Default

Scenario: As I noted inThe Relative Strength of Countries“, Japan is in dire straitsWith a deficit of over 10%, a debt to GDP ratio of over 200% and with aging demographics, Japan is likely the country in the worst fiscal positionA fear of default by Japan would put upward pressure on interest rates in all debt burdened countries.

HedgeShort Japanese debt, long inflationprotected Japanese debt, short YenSecondary hedges would include shorting US and UK debt, buying TIPS

3) Peak Oil

Scenario: A weak dollar, recovering US economy, and strong demand from China threaten to send oil well over $100/bblThe U.S. consumes about 7 billion barrels of oil a yearThat equates to about a $150B additional antistimulus at $100/bblIn addition, the easy supplies of crude oil are dwindling so mining techniques will be crucial in keeping oil prices lowSubstitutions such as natural gas and clean energy sources will play an ever bigger part in energy supply.

HedgeTIPS, commodities, gold

4) Emerging Market Asset Bubble

Scenario: Low interest rates, stronger emerging markets growth, and a continued peg on the Renminbi fuel a flight towards emerging market equities and real estate.

HedgeBuy calls on EEM, FXI & EWY

5) “WShaped Recovery

Scenario: Despite massive fiscal stimulus the United States, United Kingdom and European Unions have faltering growthGDP in developed nations turns negative due to the withdrawal of stimulus and a shifting consumer focus on repaying debt and building savings.

HedgeBuy Treasuries, the US DollarShort financials and emerging markets.

6) A Strong Recovery and Return to Normal

Scenario: The fiscal stimulus and low interest rates are able to more than ignite global economiesBanks start lending freely, consumers start borrowing, house prices start increasing, and the securitization markets spark to lifeThe financialregulationthat was so hotly talked about in 2008/2009 goes by the wayside as the future looks bright and rosieThe market is reinflated for another bust.

HedgeBuy Call options on Banks (KBE), REITS (IYR), Financials (XLF), and Emerging markets (EEM).  Commodities will spike with coming inflationWait for the second apocalypse.

Posted in Economics, Markets, Politics.

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