Grey Swans: Low Probability Events To Watch For In 2019

 “Grey swans:” events still unlikely to transpire, but if they were to, there would be profound consequences for financial markets.

Here are five “grey swans” to consider as the calendar turns into 2019.

1. BREXIT GOES OFF THE RAILS, JEREMY CORBYN RISES TO POWER BUT THE POUND NEVER RECOVERS

The UK’s process of exiting the EU – Brexiting – has been messy at best and downright horrifying at worst. A no-confidence vote in December 2018 fended off by UK Prime Minister Theresa May may have bought her some time to try to push through her ‘soft Brexit’ resolution, but there are dissatisfied parties all around. It’s not difficult to foresee a situation where efforts to pass the Brexit resolution are suspended in favor of what’s being called a “People’s Vote,” an effort to hold a second referendum on up-down, yes-no “No Brexit” or “Hard Brexit” outcomes.

Assuming a second referendum is eventually held, it’s easy to envision an outcome whereby Theresa May, despite having a 12-month window of impeachability, decides to step down as prime minister and throw the country back into another general election. By that point in time, after having guided the country through a miserable Brexit flirtation period, the Tory Party would stand in disarray with no clear voice set to unite the Tory Brexiteers and the Tory Remainers. Such disarray would give room for Labour’s Jeremy Corbyn to ascend to the prime minister’s office.

This is not a critique on political economic philosophies, but the fact of the matter is that capitalist financial markets, historically, aren’t pleased when leaders with socialist leanings goes into power. Fears of rampant government spending and ballooning debt and deficits would replace the “Hard Brexit” fears that weighed down the British Pound previously. The fact of the matter is, even if Brexit goes off the rails and is avoided altogether, the damage done to Britain’s soft power is immeasurable, leaving it as an economic backwater with respect to the broader Euroarea. Acting like an emerging market economy on the brink of disaster won’t change anyone’s minds.

2. EMMANUEL MACRON LOSES POWER AS FRENCH PRESIDENT

Throughout the fourth quarter of 2018, the “gilet jaunes” or “yellow vest” protests, engulfed Paris, among other major French cities, in riots. Given that the cause was fiscal in nature – initially, protestors were unhappy with a tax hike related to the Paris Climate Agreement – markets have been keen to see how French President Macron would react. In response to what has become a populist uprising, a desperate President Macro promised to raise wages and step up government spending.

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