‘There could be social unrest’: Finance veterans on the next big risk

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They cite AI, the strength and sustainability of Europe and the overspending of the US government.

NEW YORK – One of the main tasks of investment professionals is managing risk, and the list of potential minefields these days is lengthy.

Now, if there is a dislocation and we see a re-rating in terms of valuation of assets, we think that there will be a lot of opportunities to invest in a more distressed or opportunistic way. Oaktree has a very strong business in distressed or opportunistic investing. The United States, China and Europe are now competing on a variety of fronts. It’s not just economics – it’s also national security, it’s climate change, it’s technology, it’s energy independence. The US and China are adopting policies that are putting them ahead of Europe. Europe is lagging behind and my worry is if Europe is vulnerable, then what happens to the stability of the global economy?

To compete in technology, in climate, in energy, in defence, in national security, you need to scale. So European countries need to think: Do you want to compete as a small country or do you want to compete as Europe? Now, I don’t think they have a choice because the US and China have already started the race and Europe needs to follow. There isn’t a European company in the top 20 largest firms in the world. That’s a problem.

A weaker Europe means a more bipolar world between the US and China. I’ll give you another example. I used to work at the International Monetary Fund . The IMF is a global institution. Could we be going in a direction in which countries essentially see something like the IMF as more of a Western institution? And then China and its ball of influence essentially withdraws from that, and decides to run its relationships in a different way. We could be going in that direction if Europe weakens.

One of the biggest elements I’ve seen coming out of this Covid-19 echo period is the unevenness of the application of capital. Normally, what happens in an environment where the US Federal Reserve is on hold, or tightening, is that capital gets rationed and capital goes to fund only the most deserving of business enterprises. In an environment where there’s just so much capital flowing, and so much liquidity, you continue to see uneven deployment of capital.

Pre-pandemic, the Fed was spending a lot more time concerning itself with this divergence of different earners and the underemployed and this dichotomy that existed. I haven’t heard a thing from the Fed in the last two years about this issue and what some call the K-shaped economy. It’ll be interesting to see if their rhetoric returns to concerning themselves with the underemployed or the under-earning part of the economy.

 

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