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10 disasters money pros are worried about

Rick Newman
Senior Columnist

Money managers get paid to worry about what might go wrong, yet even by that standard, some of the world’s most successful financial pros seem surprisingly anxious.

At the Milken Institute’s annual gathering of business and finance leaders in Beverly Hills, a vague sense of dread pervades discussion of market movements and global economic prospects. “We live in a messy, scary, dark, uncertain world,” former Treasury Secretary Tim Geithner, now president of private equity firm Warburg Pincus, said during one panel discussion. Resolving issues such as income inequality and overindebted government, he predicted, will be like a “forever war.”

Such gloom may seem unwarranted, with the U.S. stock market hovering near record highs, the European and Japanese markets on the rebound and the global economy generally in a state of recovery. But financial gains around the world may have gotten far ahead of economic fundamentals, with other possible disruptions not factored in. Here are 10 unnerving scenarios that could rattle markets:

Negative interest rates in Europe. “The idea you’re paying governments for their debt is just crazy,” Alan Howard, co-founder of alternative investing firm Brevan Howard, said at the Milken conference. “Not enough has been written about what’s going on with negative rates.” One destabilizing possibility is a huge selloff of negative-yielding debt as rates rise. Famed money manager Bill Gross recently said German bunds, paying just above 0%, are the “short of a lifetime,” because prices could plunge if interest rates shoot up. That recalls the chaos of 1992, when the value of the British pound plunged and the Bank of England had to abandon its exchange-rate policies.

Rising nationalism in Europe and elsewhere. Mark Weinberger, CEO of audit and consulting firm EY, says his biggest worry is nationalism in the U.S., U.K., Spain, Germany and many other places, where attitudes toward trade and immigration are hardening. “It’s really anti-opening doors,” he says. Open borders aid population growth, draw more young people into western economies and generally generate economic dynamism, while isolationism breeds stagnation. The tension in the U.S. over a new trade pact with Asia reflects rising home-grown nationalism.

Political chaos emanating from Greece. Investors aren’t terribly worried about the prospect of Greece defaulting on debt or even leaving the euro zone, since they’ve had several years to prepare for such an eventuality. But the second- and third-order effects of political fragmentation in Europe are fraught. “Greece is smallish, but politically it’s quite a big issue,” says Joshua Harris, co-founder of investing firm Apollo Global Management. “No one expected World War I to take place. No one expected World War II to take place. Politically it’s not a rounding error at all.”

Federal Reserve rate hikes. Yes, the timing of a Fed hike has been thoroughly overanalyzed. Yet the Fed has been so reluctant to tighten monetary policy that some investors may have been lulled into believing the Fed will always have their back. ”When they do actually raise rates, it will be a shock,” predicts Joshua Friedman, co-CEO of investing firm Canyon Partners.  

A stock market bubble. Bears have been worrying about overpriced equities for months, while the markets have been grinding higher. Still, Madelyn Antoncic of the World Bank points out that the market capitalization of the world’s public companies has tripled during the last several years while global GDP has only risen by 25%. “There’s a disconnect between the real economy and the financial economy,” she says. Alex Friedman, CEO of Swiss asset manager GAM Holding, thinks a correction is coming: “I expect some time in the next four to six months the market will pull back something like 10%.”

Israel attacks Iran. It could happen, especially given Prime Minister Benjamin Netanyahu’s strong objections to the nuclear deal President Obama is negotiating with Iran. Given the strategic importance of both nations, markets would probably freak out.

Chinese aggression. China is building up its military, making bellicose territorial claims in the South China Sea and aggressively hacking the U.S. and other western governments. Iran and China “are much bigger and much more significant to the world’s economy than Grexit [a Greek exit from the euro zone] would be,” says Joshua Harris.

Surging oil prices. Many analysts think oil prices will stay where they are, around $55 or $60 per barrel, for the next year or two. On the other hand, analysts are terrible at predicting oil prices and if they were to rise back toward $80 or $100, inflation in Europe and Japan would jump, which could spook central banks there and interrupt the quantitative easing programs credited with dragging those markets out of the doldrums.

Monetary policy divergence. The Fed will supposedly be tightening soon, while Europe and Japan are still ramping up easing programs. There’s no rule saying the world’s big central banks have to act in concert, but it’s unusual for monetary policy to head in opposite directions when it has such extraordinary impact on markets. “Monetary policy around the world is going in completely different directions,” says Weinberger. “It’s causing a lot of uncertainty. I call it the uncertainty tax.”

The unexpected. As all forecasters know, the worst crises are often the ones nobody foresees, or problems that are manageable in isolation but dangerous when they collide with other problems and cascade in unpredictable ways. “Everyone’s looking for that one grain of sand that causes the whole system to collapse,” says Carey Lathrop, head of global credit markets at Citi. “It will be something we don’t anticipate.” For now, however, relax: Things are sort of okay.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.