The Future of the Economy, or Why Wall St Isn't Built to Contain This Level of Risk

Hi everyone. How are you? Welcome back old friends, welcome new ones, and here’s little Snowy giving you a hug.

Today we’re going to discuss the future of the economy, but in a pragmatic way, not an abstract one.

The last few weeks have been full for me doing sessions with many of you. And one theme's been about careers, one about life, and one big one has been about money, finances, and stability, in a time where everything feels uncertain. Are these maniacs going to blow up everything I've worked so hard for my whole life? I’m going to make a few predictions, a few observations, then teach you a few things, and then make the suggestions you need to reflect on (and for those who were asking, you can use the online system to book here.)

Many of you have said you send my articles to your portfolio managers. That’s nice, it's a good thing, and we'll come to why. This one though might cause them to have panic attacks :) so maybe it’s between you and me. Up to you. That'll tie back to the suggestions I make at the end.

I'm going to try to teach you a lot in this post, so if it's overwhelming, come back to it and read it in chunks or segments. This is normally stuff I'd teach b-school classes or C-suites or big investors, so just bear with it, it's dense, yet anyone can understand it, and as I'm going to explain, more importantly, you're already better at this than you think.

You must understand this, and I'm writing it because I care about you and I don't want you to Sink With the Ship.

Now. Let’s begin with…

A New Age of Risk

We’re now in a new age of risk. That’s what’s making many of you feel so uncertain and worried. And so the question arises: can Wall St handle this mess?

I’m going to tell you the answer, or at least mine, and to get there, I need to teach you about risk.

What does “a new world” or a “new age” of risk really mean?

It means that the world, and the markets, are now dominated by new forms of risk. Some of these are:

—Country risk (aka, is the US going to survive this mess? In what form? What'll be left?)
—Sovereign risk, which is a technical term for, is the US going to default on its debt, and set off a chain reaction
—Political risk, which means things like, are Trump and his buddies going to crash the economy with mass layoffs, trade wars, and more
—Systemic risk, which means things like tariffs that affect entire sectors and domains, and thus, feed through to the economy as a whole
—Climate risk, which means things I don’t have to explain, which impact housing, mobility, insurance, and much more.

Now.

The point to understand is this.

These are called macro risks. That’s a fancy word for the feeling a lot of you have, which is, hey, everything’s falling apart. Macro just means: affects a a society, a country, many of them, the whole world, and what Trump and his guys are doing is creating macro risk.

Macro risk is rare. The entire point of our financial systems…let me now come to that.

Wall St Isn't Built to Contain This Level or Kind of Risk, or What Macro and Micro Risk Are

Our financial systems—and the institutions that compose them, like Wall St, your money managers, and so on…aren’t built for this level or kind of risk.

What kind of risk are they built for? They’re built for micro risk.

That means things like:

—This company isn’t doing too well, so let’s move shares here or there
—This new product line isn’t working out well, so let’s trade this stock
—This set of earnings isn’t going to be good, so let’s dump this

You get the point a little bit.

But let me make it much, much more explicit.

Micro risk is a) short term, meaning six months to a year, b) about single institutions, meaning companies or banks or this kind of bond or what have you, not about, say, the bond or stock market as a whole, c) can be managed because that is the point of “stocks” and “bonds,” and d), crucially, this is what your money managers do, can do, and have learned to do.

The world of macro risk? This new age of risk? I think it is going to be beyond what Wall St and so forth can contain. 

That’s not speculation, let me explain to you why I reach that conclusion.

—They don’t have the instruments to contain it. How do you contain a risk like Trump melting down the whole economy? You need a form of insurance…that doesn’t exist right now. These will be new forms of derivatives and contracts for political risk, but so far, they don’t exist.

—They don’t have the capabilities to manage it. That means, guys like this look at indexes of stock prices all day long. But they don’t have indexes or dashboards of macro risk, because nobody’s built them yet. And so that’s another kind of risk, which we’ll name and come to in a bit.

—They don’t have the human capital to manage it. That just means: skills, people, talent. This level of management is about micro risk, and these are good and fine and normal people who are competent professionals at it. But they not been educated and taught about macro risk. They don’t have the skills for this new job in many cases, not all, but certainly a lot. They don’t teach this to you when you become a CFA or go to b-school or whatnot because…

Guys like me are the ones currently pioneering it. And you guys are reaching out to me. But Wall St and whatnot are not. Not at the level they should be. And what that tells me is that they’re not building the skills, capabilities, and competencies to manage all this risk. They could come to me, and I could teach them, help them build indexes, dashboards, systems—remember, I’ve written books and hundreds of articles about this. But that they’re not sends me a very, very clear red flag—they are way behind the curve.

That’s not point scoring. To understand why all that matters, let’s come to the next lesson.

Predictions, Expectations, and Surprises

How do “markets” really work? There’s an “expectation,” which just means a prediction. The consensus forms, among Wall St analysts and what have you, that a certain company will report earnings of this much, or this bond will yield that much, and so on.

Those expectations have been dead wrong.

That’s why the markets have been sliding.

They didn’t “expect” any of this, literally, and so they didn’t factor it into their technical expectations of this company will earn that much or the market will rise this much or whatever.

So let’s make that concrete. They thought the tariffs were just a “ploy.” Wrong. Now a trade war has begun, and stocks, meaning your savings, are sliding.

See how all that links together? They don’t have the capabilities, the competencies, the skills, the frameworks, the paradigms. So their expectations are wrong.

And when that happens, they are “surprised.” When the market is “surprised,” that’s when we get the kinds of slides we’ve been seeing recently.

Those slides will continue, because…

How Markets Work, or Your (Broken) Relationship With Money

Remember all the kinds of risk above?

They haven’t factored those in. “Priced” them in. If they had, the markets would be off by a lot more. That they haven’t factored them in tells us immediately that over the medium term time horizon, the markets are going to fall even more than they are today, it’s a given.

And you know that.

The important part of this subpoint isn’t the above. 

It’s that you weren’t surprised. You weren’t surprised by what Trump did. You weren’t surprised that from day one, these guys took a sledgehammer to things, and began to wreck the economy.

So your predictions, your expectations, even if they were just intuitive, are now better than Wall St’s.

That is where a lot of your anxiety comes from. You have a better handle on risk these days. Maybe you can’t fully verbalize or express it, but you know it, you feel it, and you worry. Are these guys keeping me safe?

And the answer to that is: in a world of macro risk, they’re not equipped to do it. Not built to do it. Not because they're dumb or terrible or anything childish. Just because they were built and equipped for a different world. In this one, they don’t have the tools, techniques, skills, understanding, which is why they’re surprised.

But you’re not. Because you saw it coming, while they pretended it wouldn’t. And they’re still doing it, by the way. They’re not pricing in the risk of mega scale climate disasters, or that Trump defaults on the debt, or whatnot. As those materialize? Poof go everyone’s savings. 

Who isn’t ahead of this curve.

How to Manage a New Age of Collapse Risk

So. That’s the situation you’re in. You're ahead of the curve, but that also means something interesting, weird, and anxiety-inducing is happening: they guys who have control and power over your assets and resources are behind it.

Let's put it this way. You understand collapse risk, which is the sum total of macro risk. But the financial industry doesn't. If it did, like I said, it wouldn't have been surprised. And it's going to take it many years to get there, which I'll come to. The practical question is:

What do you do about it?

First, you understand, really understand, what I’m teaching you. Sit with it and reflect on it.

Then, you restructure your relationship with your money and finances. That’s what I’ve been teaching many of you.

That doesn’t mean you become a doom scrolling day trader biting your nails in panic. It does mean that the passive approach of “that guy manages my money, and twice a year I just sign off on what he does” is over. You are now taking too much risk that way.

Now you must question and provoke and challenge them, at the very least. Do they understand what I’m teaching you? What is their understanding of it? Do they have a plan B for you? What is the plan A, anyways, and if it’s just, hey, everything’s fine, no need to worry, six months from now, nobody will care, run. If it’s just hey, six months from now, we’re going to put you in X stocks or bonds, question it deeply, because that’s not a plan in the terms we’re talking about—that’s micro risk management, but now you need macro risk management.

So that comes to you and me. What I’ve begun to do for many of you is educate you about all the above, and help you sort of grapple with it. I’m always happy to do that, and if you want to begin, just book a session. For those of you who are already working with me, I’d probably recommend something like quarterly reality or sanity checks. You go and talk to those guys, then you come and talk to me, and I’ll advise you on what makes sense, what doesn’t, if they’re doing a good job, or if you need new guys.

Does that make sense?

For those of you who want to be more active, and really go for it, probably more monthly or biweekly sessions are in order, to kind of teach you how to develop your skills in this arena. What should be looking for, what kinds of skills do you need, how should you think about it? It’s not just about technicals. In fact very little of it is. It’s about taking that intuition you have and developing it, and remember, right now, you are better at this than all of Wall St, who was surprised, and you weren’t. Just that, and not in a mathematical way, but just in a common sense one.

So those are concrete steps. For those of you who are sort of puzzling this over, and beginning to reckon with it, you can reach out to me anytime, I’m always here. But let me leave you with my conclusion.

The Future of the Economy, Why the Jitters Aren't Temporary

Wall St, our financial institutions, systems, organizations, are not built for or equipped to contain this. For you. For anyone. Even for themselves.

Reinventing all that will take maybe at least 5 years. How do you trade an instrument that gives you, for example, “insurance” against a Trump melting down your whole economy? How do you create an index, and I don’t mean a stock index, but a risk gauge, that really makes climate risk real? That’s going to take time. It’s not going to happen overnight. Much of Wall St will fail at it. And you need to understand that, because in that intervening time period, you have a handful of options, one, take a more active approach, two, take full responsibility, three, Sink With the Ship.

I don’t have to tell you which are the good choices.

Understand that and really sit with it. Our financial institutions aren’t built for this new age of risk. That’s not a get, I’m not disparaging them. I’m just pointing out that the world they were built for is now coming to an end. In that one, OK, they did their job, as competent professionals, reasonably well. But in this one, can you count on them? To get all this right? When the incentive they have is not to, in many ways, but to hold on to what they have, which is your money? 

If they don’t have the skills, capabilities, tools, techniques, paradigms, and it’s going to take them five years to get there, what does it mean for you?

I started sessions because you guys suggested it, not me. And I’m amazed and humbled to do them, frankly. One of the roles that I’m beginning to see I have is this…new thing. What do we call it? Guy that advises you on the economy? Guy that bridges the world of micro and macro risk? Guy that helps you manage not just your money, but how your money is managed, why, and what for? I don’t think we have a name for it yet. And it doesn’t matter. I’m just pointing out to you the way I see our relationship developing.

So don’t get burned here. I care about you and I don’t want you guys to end up in the mess so many others are. 

The jitters racing through the markets today aren’t temporary. They are telling us something crucial. Risk is now outpacing the system’s ability to manage it. Not in some abstract way. For you. For everyone. Even for itself. As that gap between risk materializing and the system’s ability to contain it grows, these jitters will widen, grow, and turn into greater shocks.

That is part of what I mean by Sinking With the Ship. That’s why I teach you about all this. Now you must change, and in even greater ways than all this. I know you can do it, and I'm always here for you.

Lots of love,

Umair (and Snowy!!)

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