The next black swan event may occur in the US, rather than China, as hasty tapering and renminbi liberalisation may undo the benefits of quantitative easing in the former country, argues independent global strategist Parag Khanna.
The bull run in the US – the S&P 500 gained 30% in 2013 – may collapse if the tapering of bond purchases by the Federal Reserve is too aggressive, said Khanna at AsianInvestor's Investment Summit in Hong Kong last week.
There are growing concerns that if tapering occurs too quickly, the equity bubble could burst, he noted. Some observers think the market-cap-to-GDP ratio is reaching dangerous levels.
China has its own issues, said Khanna. While the likelihood of a hard landing there has decreased over the past two years, a credit squeeze would present problems. “If you have tightening credit and rising cost of capital, what is that going to do to the banking sector and the housing market?” he added.
“On the other hand, … if China does opt for renminbi liberalisaiton, what impact would that have in terms of undoing the benefit that [quantitative easing] has had on asset prices, and what impact would that have in an inflation scenario?”
Meanwhile, recent economic developments in North Korea could be described as unforeseen, said Khanna (pictured right).
The progression of its nuclear weapons programme has overshadowed what Khanna describes as “a clear trajectory of the supply chain-ification of North Korea” with the establishment in recent years of special economic zones near the border with China.
During a visit to Seoul last November, Russian president Vladimir Putin lobbied for an "iron Silk Road" from Russia to South Korea. “You can’t do that without passing through North Korea,” noted Khanna.
“Cooler heads are prevailing, even though not many people would describe the North Korean government as particularly rational,” said Khanna. “But you find at a day-to-day level, significant amounts of rationality in the commercial sphere.”
A different scenario has emerged in Ukraine, which he described as “a basket case”. New gas pipelines from Russia to Europe are being built that do not pass through Ukraine, which was the path typically taken by older pipelines.
“Geopolitics is becoming much more of a tug-of-war over supply chains,” said Khanna. By diversifying their supply chains, countries can mitigate their geopolitical risk when it comes to economic trade.
He advises: “Be as diversified as you can be.”
¬ Haymarket Media Limited. All rights reserved.