Bill Gross, the exiled “Bond King”, explains six possible ways that a “run on the shadow banks”, non-bank financial organizations of systemic importance which remain lightly regulated even after the near meltdown of 2007:
1) A central bank mistake leading to lower bond prices and a stronger dollar.
2) Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.
3) China – “a riddle wrapped in a mystery, inside an enigmaâ€. It is the “mystery meat†of economic sandwiches – you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.
4) Emerging market crisis – dollar denominated debt/overinvestment/commodity orientation – take your pick of potential culprits.
5) Geopolitical risks – too numerous to mention and too sensitive to print.
6) A butterfly’s wing – chaos theory suggests that a small change in “non-linear systems†could result in large changes elsewhere. Call this kooky, but in a levered financial system, small changes can upset the status quo. Keep that butterfly net handy.
The first is practically a given. Nobody keeps all the balls up in the air forever. The second is under way right now. China’s stock market bubble appears to be popping.
Could we be in store for a “perfect storm” of bad economic and geopolitical news? Interesting times.
