Listening to Your ‘Gut’ & Black Swans

“Gut feel” is not something you are necessarily taught nor will you find as a subject in finance or economics at uni.  It is, however, a remarkably effective tool when making a decision when confronted with asymmetric inputs.  The mainstream press may be relatively effective in reporting all the tensions in the world but it rarely links this with finance, instead reporting the usual ‘everything is fine’…  ‘shares and property always go up’ doctrine.  However unless you watch SBS World News or the like you are likely spending more time learning about a house fire or car crash in Melbourne than growing tensions in the South China Sea, or US/Russian tensions fully explained, etc.  You are also less likely to hear why financial markets are so “fundamentaless” or of the current precariousness of the world’s most systemically important bank (Deutsche Bank) at present.  To be fair 2016 has seen more mainstream reporting of the current financial set up as it becomes too hard to ignore.  It is no coincidence that the spot price of gold is currently up 26% and silver up 41%.  More people are listening to their ‘gut’.

Is it any wonder?  Right now your ‘gut’ is digesting a quite extraordinary cocktail:

  • Central banks are very clearly flagging they have reached their limits, and conceding the ineffectiveness, of the unprecedented monetary stimulus they have unleashed since the GFC.  If there is one overarching theme of 2016 and the resulting beginning of this gold and silver bull market, it is the loss of faith that central banks have ‘got this’.  They don’t.  Whether you understand the machinations of macro economics or not, your gut knows you can’t keep doing this and that it’s not working anyway.
  • You are looking perplexed at financial and property markets at, or near, all times high when the underlying economy is tepid at best.  You are being advised to buy shares (at these highs) looking for yield because rates are near zero whilst your gut is telling you you’re chasing 3% yield but risking a 50% fall on your capital…(from which you need to make 100% gains to get back to even).
  • Having just digested Brexit, and probably now appreciating why it occurred, it is now swallowing the US Elections.  It’s the same theme – anti-establishment, anti-globalisation.  This mood is so strong that with a less ‘out there’ candidate than Trump it would be a whitewash against Clinton.  The hatred of her is only matched by that of him – polls are evenly split.  This is easily the most divisive US election in history and either way you can expect social and market turmoil on the result. 
  • Geo political tensions around the world have not been this heightened in a long time and too numerous and intertwined to do justice now.  Last week the US and South Korea announced joint nuclear drills (ala North Korea), the US, Japan and China are not budging on the South China Sea conflict and playing dangerous games, and tensions between the US and Russia have hit multi decade lows and intertwined with the Syrian war, a war unleashing a refugee crisis like no other.  That crisis is then fuelling another war of a different kind with the political backlash being felt through Brexit, Merkel’s recent landslide defeats, the upcoming Italian referendum, today Hollande closing the Calais refugee camps, etc etc.  And of course there is ISIS which needs no further explanation.

On the aforementioned US / Russian tensions we must always remember we may be getting a one sided view on what is happening.  For a little balance (though of course, inevitably the other way) this is what Vladimir Putin had to say to western journalists recently:

“We know year by year what’s going to happen, and they know that we know. It’s only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger – this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don’t know how to get through to you anymore.”

Any one of these many ‘black swans’ circling at present could spark the next financial crisis.  Sometimes you need to listen to your gut and protect yourself from that happening…