Thinking the Unthinkable, Speaking the Unspeakable (February 2022)

Risk Commentary

Overview

A key role of risk professionals is a timely, cogent analysis of those matters which are almost painful to consider, and yet can be make or break issues. This installment addresses a few of them.

Ukraine – Vladimir Putin has massed troops on the border of Ukraine and conducted discussions with Chinese President Xi Jinping, while General Miley has made public statements about the timing for the fall of Ukraine if Putin decides to invade (perhaps as a counter to the rapid collapse in Afghanistan). Complicating matters is the conflicted response of Germany and France. On the one hand, they are concerned about Russia’s expansion and on the other hand, are dependent on Russian energy supplies. Additional complications stem from the apparent presence of 1,500 U.S. national guardsmen in Ukraine and their training locals on the usage of anti-tank weaponry.

Comment: Putin probably was emboldened by Biden’s troubled retreat from Afghanistan and believes conditions are ripe for extracting some concessions from the Western nations. It would be naïve to assume the absence of coordination with President Xi Jinping. Lastly, Biden’s approval is well below par, and his office is likely to heavily weigh the political impact associated with any response.

Taiwan (fighting the last war) – Xi Jinping is set on integrating Taiwan and has been encouraged by the non-response to his crackdown on Hong Kong. Xi appears to have consolidated his power and is on track to become a life-time ruler. While the use of force is a possibility, there are numerous other means for Xi to achieve his objective with the most likely being something similar to Hong Kong with the election of a pro-China legislature and a crackdown on dissent. Given the fact that Taiwan has been and remains a strategic location for the manufacture of computer chips, this item remains a major concern. Regarding our “fighting the last war” comment, it is doubtful that the three aircraft carriers near Taiwan will be effective when China has numerous other means for achieving its goals including numerous ones on the biological front.

Comment:  This problem is broader than Taiwan as it impacts the West’s strategic footprint in Asia. The trust in the US has been pressured by the tortured exit from Afghanistan.
 
Web 3 – “Web3 is an idea for a new iteration of the World Wide Web based on the blockchain, which incorporates concepts including decentralization and token-based economics,” per Wikipedia. Our view is that there are many areas of the economy which are likely to undergo major changes and in retrospect will appear quaint. Examples include:
 
Credit cards – the average 16% rate for individual unsecured loans appears to be    unsustainably high and is ripe for disintermediation via the “DeFi” crowd. Watch for Square, PayPal, and others to make a broad push for consumer-based cards.
 
Money transfer fees – in the future, expect fees to be a fraction of current rates.
 
Checking accounts – over time, checking accounts might face more effective and efficient products such as accounts linked to multiple financial needs of clients, with easy shifting of funds, and more rapid payment and receipt of funds.
 
Loans – watch for an acceleration of the origination and funding of loans based on distributed ledger technology.

Comment:  Domestic regulators are slowly becoming more comfortable with the new technologies and will accelerate the adoption of the technologies as regulation becomes more standardized. With major technology shifts, the prior leaders rarely maintain their leadership.

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