These Are The Top Risks 'We, Average Americans' Face In 2018
More broadly: the fact that Buffet is heavily invested in the US dollar (even though he almost certainly understands the risks) should provide huge cause for concern about the valuations of all other asset classes.
9. Derivatives and interconnected markets
Foreign exchange, interest rate and equity-linked derivatives are the most complex, opaque and sizeable markets. Yet few American experts (let alone politicians, media and ordinary folk) know what they are, how big they are, or understand the risks involved—despite the fact that the failure of a derivatives player, AIG, caused the last global financial crisis.
The Bank for International Settlements recently estimated the total notional value of over-the-counter derivatives at $542 trillion—roughly eight times global GDP. But the market is actually larger because much of the trading was done off the books.
There are only two things you can be sure about derivatives:
A failure in any one of the major counterparties will bring the entire system down, and
Because AIG clients were bailed out last time, there were no incentives to remove bad actors and faulty practices.
10. An unaccountable accounting profession
US and global corporate financial statements run hundreds of pages. But experts neither understand nor trust them. Current rules enable corporations to massage profits and hide much of their debts off the balance sheets—making it impossible to assess operational performance.
The wealthy would never trust a corporate financial statement. They always hire their own experts to perform due diligence prior to investing serious money in a firm. Despite this, politicians allow US accountants to publish more, and increasingly complex, rules—so they can charge ever-greater fees to interpret them.
The problem is larger than it appears. The fact that Americans can’t trust or rely upon corporate data means they can’t trust the CEOs who run those businesses, either.
Therefore, when politicians blame the private sector (and capitalism) following the coming crisis, there will be few CEOs with any credibility left to defend it.
A final note. While risks abound, there are some short-term positives. Public officials can mitigate or deal with many of the threats listed above if they muster the courage or the political will.
Furthermore, while the US and global economies are being run as quasi-Ponzi schemes, the hedging community has been warning of the risks for more than two decades. While an implosion is inevitable, it is by no means imminent.
That said, the “Krugman con” Ponzi is a like a “sword of Damocles,” which - while not always visible - hangs over the actions of all states, businesses and individuals.