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New Year, Really Big Threats: ‘Fat-Tail’ Risks Rise

Aaron Task
Editor in Chief
Daily Ticker

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The risk of "fat-tail" events is rising, which will make 2012 a particularly challenging year for investors, according to Pimco CEO Mohamed El-Erian.

The stock market seemed unconcerned early Monday and El-Erian's forecast, via a WSJ op-ed, may seem self evident -- really bad stuff may happen this year!

Still, two of the fattest fat-tail threats were evident as the first full week of trading in 2012 gets underway:

Europe on the Brink: The crisis in Europe remains acute, as evinced by Monday's 6-month debt offering by Germany, featuring negative yields for the first time ever. The ECB's pledge last month to provide banks with unlimited funding for up to three years is helping the market deal with another rise in Italian debt yields and Unicredit's ongoing implosion. But investors' willingness to pay Germany to hold their money is another clear sign of the existential fears stalking the eurozone.

Iran Rattles Nuclear Saber: Reports Iran has begun enriching uranium at a new underground site sparked a war of words between U.S. and Iranian representatives this weekend. Amid Iranian threats to block the Straits of Hormuz, a critical choke-point for global oil, let's hope the fighting stays limited to heated rhetoric. This week, Tim Geithner is in China seeking assistance from China and Japan to impose economic sanctions on Iran, a reminder of why America must limit its criticism of China's trade and currency policies. Meanwhile, Iran's Mahmoud Ahmadinejad is in Latin America seeking to shore up support for his regime. Crude prices were subdued in recent trading but the risks of a price shock are rising.

At the same time, Kim Jong Un continues to try and consolidate power in North Korea and China's economy has been wobbling lately, two other big risks as 2012 gets underway.

Finally, the U.S. economy remains vulnerable, despite recent positive signs such as Friday's solid jobs report. A recession is "very likely" in 2012, according to fund manager John Hussman, and the Economic Cycle Research Institute is sticking with its new recession unavoidable call, despite recent evidence to the contrary.

If the market really climbs a "wall of worry," 2012 could be banner year for investors because there is an awful lot to worry about.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com