Think the unlikely
Five events that could catch everyone out next year Matthew Lynn
An Italian bank will be bailed out. President Donald Trump will tweet something stupid in the middle of the night. The EU will fine Facebook/ Apple/Amazon a few hundred billion euros for invading privacy/avoiding tax /monopolising the market (delete as appropriate). There are lots of things we already know will happen in 2017.
But what are the genuine black swans – that is, events that are way off the radar right now, but which could disrupt the financial markets?
Every year one or two come along. Very few people thought that Leicester City would win the Premier League, that Opec would finally start driving the oil price back up, or that political leaders from David Cameron to Matteo Renzi to Francois Hollande would be on the scrap-heap by the end of 2016.
Here are five events that could – just possibly – catch everyone out.
A tech crash in China
Everyone is fretting about a re-run of the dotcom bubble of the 1990s on New York’s Nasdaq. Shares in the giants of the internet have been soaring all year. But it is in China that the valuations are getting really crazy.
Four of the seven most valuable private companies in the world are Chinese, and all of them are less than seven years old. The likes of Didi Chuxing and Xiaomi are worth a lot more than Snapchat or Uber. Last year, 19 “unicorns”, as tech start-ups worth more than a billion are known, were created, and by October another 10 had already joined them this year.
Venture capital money is pouring into Chinese start-ups. It is easy to figure out the attraction. Put the explosive growth of the internet and the rapid expansion of the Chinese economy together and you have a powerful combination. The trouble is, those kind of valuations can turn into a bubble very quickly. If one or two were to collapse, as they inevitably will, it could crash the tech sector globally – and it would be a collapse that started in China.
A Baltic market collapses
There is understandably a lot nervousness about conflict between China and Taiwan, especially with Trump expressing doubts about the traditional one-China policy.
But that is not the only potential geopolitical flashpoint. Vladimir Putin has long had an eye on bringing the Baltic states, including Estonia, Latvia, and Lithuania, back into the fold of the Russian empire.
Who says Trump, or an embattled Angela Merkel of Germany, will take the steps necessary to protect them?
A Putin advance on Russia’s old Baltic territories would lead to a collapse of those markets.
Estonia’s equity index is trading at an all-time high, and all three have been on a growth spurt. But a crash would ripple out through the developing markets, and the developed ones as well.
More countries join the EU
When the UK triggers Article 50 and starts the process of leaving the EU, the federalist bureaucracy in Brussels will be smarting.
It is hard to present yourself as the future when one of your biggest members has decided to leave. But heck, the game is not necessarily up. What better way to breathe some life into the project than to bring in some new members?
Among the candidates, Macedonia, Albania and Serbia do not really qualify for full EU membership. And they hardly equal the UK – their combined population is just over 12 million, and their total GDP is $62bn (£50bn), against 65 million and $2.6 trillion for Britain. But if you hustle them in, it will look good.
Facebook merges with Apple
Almost 20 years ago – in February 1997, to be precise – Apple bought a computing company called Next.
By doing so, it brought its founder Steve Jobs back into the fold. Jobs went on to launch incredibly successful products, from the iPod to the iPad to the iPhone, that made Apple the biggest company in the world. Yet five years after his death, it is clearly drifting under his successor Tim Cook. It may still be a great company, but it is about as innovative as Powys District Council. One solution. Why not try the same trick that worked so well back in 1997?
There is no founder to bring back this time. But Facebook’s Mark Zuckerberg is a fantastically creative entrepreneur. A Facebook-Apple combination, with Zuckerberg in charge of the combined entity, could dominate the 21st century.
Trump trade war with Germany
On the campaign trail, Donald Trump promised to protect American industry from China.
In office, he might find there are a couple of problems with that. Such as? Crashing the global economy, for starters. And the fact that workers in Michigan don’t want to work 80 hours a week on starvation wages making plastic toys, which is what most Chinese workers do. But there is another country with a massive trade surplus with the US – Germany. That has hit $80bn, up from $30bn back in 2009. It is clearly the result of currency manipulation – without a cheap euro, German industry would not be nearly so competitive. Even better, it is mostly made up of highend manufactured goods – precisely the kind of jobs Trump promised to bring back to the US.
If Americans had to buy a few more Lincolns and Cadillacs instead of Mercs and BMWs, it would do a lot for his blue-collar electoral base. He’d even be avenging his grandfather, Frederick Trump, who was kicked out of Germany for draft-dodging. The VW diesel scandal is surely enough of an excuse to ban German cars.
Of course, none of those five events may happen. But there is always something that comes along every year to give the markets a jolt. Any of those events would certainly do that.