Apologies in advance, a bit of a rant this time round. That being said, alluding to the classic Supertramp album in the title surely gives me some sort of leeway. Anyhoo, when it comes to the subject of poly-crises, I come not to praise them, but to bury them.

Grey / No -haired folk like myself appear to have an in-built tendency to really enjoy appearing both wise and concerned at the same time. I honestly cannot remember if I felt it at the time, but such an approach now must appear incredibly smug and patronising to those generations with less bland / more hair. And it is not like they are not just a little bit sensitive in the first place. Sometimes, rarely, this patronising commentary has merit, however in the case of poly-crises, it is worse than misplaced, it is misleading. And worse, those pontificating on the subject know it. Or at least they should. Given the circumstances, they probably cannot recall that great 90’s album by Radiohead. No, not Kid-A, the other one, yes, Amnesiac. But they should.

Because that is what it takes to not know that a poly-crisis, multi-crisis, insert-synonym-for-lots-crisis world is the absolute rock-solid norm for pretty much all, bar the 2010’s, of financial history. I appreciate it may be a bit repetitious, but negative interest rates (the first time in history) and the $18 trillion (that’s 2/3 of the GDP of the USA) that central banks magicked up and threw on the major economies like, and in fact as, a big wet safety blanket is not the norm. The results were inevitable. Post 2009, the risk-return characteristics of markets were altered. Market risk was diminished without impacting market returns. When bad things happen, we cut rates. When more bad things happen, we cut rates again. Then we start buying good assets. Then when we have bought all of the good assets, we buy less good. This “helpful” attitude from central banks was good for funds and awesome for leveraged funds (aka PE). However, this was not a poly-crisis world, this was a mono-crisis world. The only thing that counted was when the central banks going to stop being so “helpful”. Well, half of it happened last year and that was not so much fun. Worse, folk started talking about poly-crises.

The mono-crisis world also impacted funds risk management. The main driver here has been the development of regulation that greatly increased to role and scope of the risk manager in the fund food-chain. This increase of responsibility has potentially had the knock-on effect that what used to be risk management has become mostly risk monitoring. That is, the focus of risk management has moved from “what-if” analysis to “what-is” analysis. This shift was greatly aided by the (effective) fact that the output of any what-if analysis could be neatly summarised in the single sentence – The central banks will bail us out. A fact evidenced in March 2020. For the first time in ten years, the markets really panicked. Risk was back. And then the central banks bailed them out.

So, the main thing that risk managers got from the mono-crisis world, apart from the multiple levels of additional regulation (and it would be impolite not to say thank you, so thank you) was a bad education. We are not in a poly-crisis world, we are in a normal world. What are the characteristics of a normal world? Folk are worried about inflation and / or the central banks reaction to it. There are a range of commodities whose price is going up a lot or down a lot (which may impact inflation yadda yadda…). Something is going wrong in Europe / Eurozone / Euro (chose one, or more, as appropriate). There is a crisis in some of the Emerging Markets. And I do not intend in any way to appear to trivialise it, but there is also a war(s) going on somewhere. You might say well that sounds like what we have experienced in the last ten years (bar the pandemic and I grant you that is a new one, sort of). The real difference is that all of the above, and more, normally impact global markets in sometimes small, sometimes large and always overlapping ways. Both in their forecast and their realisation. And investment and risk managers had better get used to this fact, again.

The only risk that is truly new is what happens to markets as and when the central banks try to unwind the $18 trillion on their balance sheets. I am guessing it will not be pretty, but answers on a postcard, please.

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