2017 Financial Markets Conference—Douglas Rediker Keynote—2017: A Year of Uncertainties, Reactions, Hopes, and Hedges

Douglas Rediker of International Capital Strategies discusses the differences between political risks and political uncertainty.

Transcript

Marie Gooding (Moderator): I can tell from the enthusiasm of this group that you had as much fun today as I did in listening to the discussions, and tonight's dinner session will provide even more food for thought. It's my pleasure tonight to introduce our keynote speaker. Douglas Rediker is the founder and executive chairman of International Capital Strategies in Washington, DC. He's a nonresident senior fellow at the Brookings Institution, and he's been a visiting fellow at the Peterson Institute for International Economics. Doug represented the United States on the executive board of the IMF [International Monetary Fund] from 2010 to 2012. He is a member of the World Economic Forum Global Future Council on global economics, he previously served as the chairman and vice chairman of the WEF [World Economic Forum] geopolitics and geo-economics Global Agenda Councils—and that is a lot to say, Doug. [laughter]

In 2007, Doug returned to the United States after living and working for over 16 years in Europe, where he served as a senior investment banker and private equity investor for some of the world's leading financial institutions. Doug's global experience—both inside the policy sphere and in the private sector—gives him a unique perspective on our conference theme of global financial risks. Tonight, Doug will talk to us about the uncertainties, reactions, hopes—and perhaps some hedges—we can expect to encounter in 2017. Please join me in welcoming Doug Rediker.

Douglas Rediker: Thank you all. Thank you, Marie. As some of you know, I tried stridently to wing it, which is the way I normally like to do these things, and I decided it was a little bit too sensitive, so I actually wrote this out. But there is a Q&A after, and so maybe we can get into some good stuff then.

Generally, at the beginning of each year I go through the exercise of putting together my top 10 geo-economic themes for the year ahead. And then I use that as a starting point for presentations for the rest of the year, updating as events play out either as forecasted or not. But this year was different. With so many fundamental events unfolding at such a rapid pace, every presentation meant starting anew "what to expect in 2017, around the world" speech virtually from scratch. But when I did look back at this past January in putting together the first look at the year ahead, it was clear then—and it's clear now—that as we headed into 2017 there would be one major theme that dominated all others: uncertainty. And one major question for markets, does any of it matter?

Now, as for uncertainty, at the top of the list is most definitely uncertainty about the global consequences of the election of Donald Trump. But also on that list is uncertainty about the future of Brexit negotiations between the United Kingdom and the EU [European Union]; uncertainty about how China will balance its desire for overall stability in a crucial political transition year, with increasing economic and financial stability pressures at home; uncertainty about the future of Europe, which is finally emerging from the euro crisis, holding a series of crucial elections, and grappling with how to hold itself together; and uncertainty from geopolitics, with an increasingly aggressive Russia seemingly willing to use unprecedented methods to try to undermine Western democracies; and an ever more dangerous situation in North Korea.

So now, almost five months into this uncertain year, with Emmanuel Macron's victory yesterday providing sorely needed relief from at least one specific threat, some of the most acute uncertainty has become a little less uncertain. Nevertheless, to those who feel confident about the state of the world, I would argue that we are still not in a "normal" year, and that we should take care to avoid complacency. Uncertainty still serves as the most appropriate starting point for any assessment of the risks and opportunities facing the world over the remainder of 2017.

First, let's distinguish uncertainty from political risk—which I would define, from a financial markets perspective, as the risk that a political event impacts the return on an investment, either positively or negatively, in a way that pure economic or financial projections would not have anticipated. And I'm distinguishing this from the concept of uncertainty, in which there is concern about major premises and the stability of a basic global framework under which strategic decisions are taken. In an uncertain environment, the universe of possible outcomes of any given event expands so much that traditional political risk analysis is simply inadequate. Now, political risk has always been the prism through which emerging-markets investors see the world. Those who have spent their careers in emerging markets are used to dealing with selective or arbitrary application of law, legal uncertainty, opacity, hidden agendas, conspiracies, autocracies, nepotism, favoritism, conflicts of interest, self-dealing, political motivations that often overwhelm straightforward economic or business considerations.

Emerging-markets professionals start with a perspective—and a skill set—that is now increasingly appropriate and applicable elsewhere, given that politics and political risks simply cannot be ignored. I raise this so as to contrast this mind-set with the increasingly siloed algorithm model and data-driven quantitative investment models that have come to dominate asset allocation and risk management decision making. Emerging-market investors understand that qualitative political inputs are important, and sometimes surprisingly determinative, of outcomes. In a world in which the president of the United States can move global markets with a tweet, it should be clear that political risk is no longer limited to emerging markets.

When it comes to political risk, we would all be well advised to put on our political economy hats, emblazoned with the words "We are all emerging markets now." [laughter] But to some degree, given the scale of potential global shifts and unknowns, even putting more focus on political economy considerations may not really be enough to understand the world. The thing about political risk is that, unlike uncertainty, it can be quantified. Yes, it's more an art than a science, and far more subjective than other quantifiable metrics. Still, most political events can be analyzed and seen through existing paradigms and frameworks.

For example, at the height of the euro crisis, concern about Greece's potential to leave the euro was a major political risk. But those who studied it closely could make reasonable assessments of likely possible outcomes. Similarly, when Russia annexed Crimea, and quasi-invaded Ukraine, analysts could identify specific fears about the likelihood and consequences of Russian tanks crossing the border and escalating a formal military action. Those who focused on political risks broadly knew what they were concerned about and could estimate the range of possible outcomes.

The difference between political risk and uncertainty is that while the likelihood of a Trump victory last November could have been quantified, the implications of what he and his administration could do, on a wide array of issues, is so far reaching as to expand the universe of possible outcomes such that they are too complex to assess. That is uncertainty.

And I'm not speaking only about markets but also about world leaders, institutions, and others around the world who feel an amorphous sense of unease emanating from such a complex array of possible outcomes—outcomes that cannot be easily slotted into existing parameters for global decision making. Now, the U.S. plays a unique role, and even a wobble in the basics of U.S. foreign policy—in its role as the anchor and leader of the existing global world order—leads to heightened uncertainty at a very fundamental level.

In addition to U.S.-inspired uncertainty, 2017 also includes uncertainty about the progress and outcome of Brexit negotiations and its impact on the city of London—one of the world's leading financial centers—and about the UK's future role in trade, security, governance in global institutions, and beyond. Also uncertain is the overall future of Europe. Earlier this year Angela Merkel supported a proposal by the EU to move toward a multi-speed Europe, thus adding uncertainty to the question of core relationships within Europe.

And then there's this autumn's political selection process in China, where the reselection of President Xi poses very little uncertainty but where the opaque process by which the Chinese government balances delicate national security, financial, economic, and domestic political considerations in reforming its economy leads to uncertainty—not just about China, but about the stability of increasingly dependent neighbors and trading partners.

So in 2017, we are really experiencing some pretty big questions about some of the most interconnected and strategic countries and regions in the world: the U.S., the UK, Europe, China. In a highly interconnected world, the potential global consequences of any one of these would be complex—far more than would be the case in assessing specific concerns about whether Greece will make its bond payments or whether eastern Ukraine will fall to Russian aggression. All of these causes of uncertainty, however, of all of them, the uncertainty about the current U.S. administration's policies, on both domestic and international affairs, is exponentially greater than the others. The U.S. is the indispensable nation, the leader of the liberal world order. When that role is called into question—even slightly—the system wobbles.

It is not uncommon for any new administration to take time to grow into the role of governing. On foreign policy issues, however, this administration has been uniquely slow in filling crucial sub-Cabinet positions in relevant departments and agencies. Many current personnel also lack governing experience, and are only now learning of just how complex policymaking can be, and of how different is the process of government from that of a CEO or of a military general. The administration's lack of policy specificity, and political or ideological coherence, has led to a sense that policymaking is value-neutral, transactional, and ad hoc. Producing the most uncertainty has been a president who has affirmatively boasted of the benefits of unpredictability, and his White House strategist, who has argued for a historic end of an era by dismantling the current domestic and international multilateral establishment—an establishment that has overwhelmingly benefited U.S. interests.

The U.S. was the architect of the post-war, rules-based liberal world order. Allied with Europe, the U.S. crafted a multilateral trading and economic system based on shared values and interests. And while some in the rest of the world expressed frustration with this system, in fact, the system provided security, order, and stability sufficient to allow global finance, commerce, and trade to flourish. This multilateral system was effectively designed to be rules-based, specifically to advance a U.S. vision of open markets, representative liberal democracy, and rule of law. The U.S. benefitting from the structural architecture of this system, providing enormous strategic and economic benefits, far outweighing losses in any individual trade dispute or macroeconomic stability assessment.

The words "global governance" may be taboo in the new administration, but the U.S.-crafted system allows decisions and institutions like the World Bank, the IMF, and the G20 to be taken such that member countries feel that they have a voice—even if only a small one. Should the U.S. actually walk back from its engagement of these institutions, or follow through on threats to renounce our commitment to the Paris Climate Agreement, it is far from clear that the U.S. will be any better off.

China has made it known that it is ready and willing to assume the mantle of leadership. Over the past several years, China has spearheaded efforts to create a series of new multilateral institutions, including the AIIB [Asian Infrastructure Investment Bank], a new development bank, the Chiang Mai Initiative, and more. Under the presidency of Xi Jinping, China has evolved from a self-described adolescent on the world stage to an increasingly confident leader, ready—especially on issues of international economic policy cooperation—to step up. At both last November's APEC [Asia-Pacific Economic Cooperation] meeting, and in Davos in January, President Xi publicly expressed China's willingness to play the stabilizing anchor role on the multilateral stage. Imagine: one-party, communist, autocratic China making the case to step into the role of keeper of the free market and rule of law in multilateral affairs.

And yet at Davos, the business and finance professionals were all relieved. They came away calm—satisfied—that there was, in fact, a plausible, acceptable alternative to U.S. anchoring. Now only a few weeks later, at the Munich Security Conference—which is attended by a different set of global elites, in that case, the foreign policy expert community—the Chinese foreign minister gave virtually the same speech, and he was met with deep skepticism about China as the anchor of multilateral cooperation and the state of the liberal world order. Now this gap between the perceptions of the business and market leaders on the one hand—upbeat, willing to look through fundamental risks and foundational instability, and that of the foreign policy experts, who remain deeply nervous about the state of the world—that gap has got to narrow. But it remains uncertain which camp will be proven right.

One of the most dangerous concerns in the foreign policy community, in Washington—and in foreign capitals around the world—is that the current U.S. administration is approaching many decisions without adequate understanding or consideration of the likely reactions and responses of those on the receiving end. For example, President Trump's willingness to consider unilateral withdrawal from NAFTA [North American Free Trade Agreement]—or his confusing statements about renegotiating the Korean Free Trade Agreement (KORUS)—were apparently made without more than cursory consideration of the likely reactions of Mexico, Canada, or South Korea, which tomorrow—or tonight actually, Korean time—is about to hold an important presidential election. I suspect that he did not give much consideration to the potential reaction of financial markets, either.

Admittedly, the Trump administration is gradually recognizing the need to anticipate likely international reactions to its strategic trade, economic, and political initiatives. Having said that, real concerns remain. To anticipate other countries' reactions, an experienced foreign policy apparatus is of crucial importance, and this is an administration that appears to be making an affirmative effort to marginalize the State Department and to keep crucial positions vacant. With concerns about overall U.S. foreign policy, and specifically about U.S. willingness to abide by long-standing, bilateral and multilateral commitments, many prudent government leaders are adopting a strategy of hoping for the best from the U.S., but contemplating how to hedge their economic, political, and strategic interests—just in case their fears of abandonment or antagonism prove correct.

The elections today in South Korea are a prime example of the likely election of a leader who has advocated a good relationship with the U.S. but also for moving closer to China. Hope, but hedge. Globally, this hedging strategy is likely to benefit China, Russia, and other regional powers who will likely continue the already rapidly increasing trend away from globalism and toward regionalism. Among the risks of regionalism is that regional powers can bolster their own regional status and interests by exploiting uncertainty about U.S. commitments, and embrace a kind of involuntary regionalism. I define "involuntary regionalism" as a case where a strong local power coerces weaker countries into regional, or even competing multilateral alliances, which leads to a weakening of the global status quo and weakens smaller countries' own sovereignty.

"Hope, but hedge" is not easy. It's not easy in Asia, where the U.S. withdrawal from the Trans-Pacific Partnership [TPP] was an enormous strategic blow. While the U.S. and some others are going through populist, nationalist, protectionist, and anti-trade debates, Asian countries remain virtually unanimous in their support for increasing trade and globalization. The Chinese-supported alternative to TPP is known as the Regional Comprehensive Economic Partnership, or RCEP, and Asian countries are now grappling with whether to accept the RCEP as an alternative to TPP, or—as is being advocated by Japan—to renegotiate TPP to include the 11 remaining countries...though without the U.S. at the table.

In order to balance risks from an increasingly assertive China, key Asian countries—including Japan, South Korea, Vietnam—had looked to the U.S., in part via TPP, to serve as a hedge against Chinese designs and expansion. That strategy is now at risk. For Europe, "hope, but hedge": their strategy is even more difficult. On economic and trade issues, for now, Europe—in spite of Brexit—remains relatively cohesive and tethered. But strategically, U.S. support for a strong and united EU has never before been subject to the questions that have been posed from this White House. European foreign policy remains largely at the national government level, not as a competency ceded to the EU. That makes the ability to forge a common foreign policy position very difficult, and it increases the risks of a "divide and conquer" strategy from external antagonists, including Russia.

It remains as yet uncertain whether doubts about U.S. commitments to Europe will result in greater internal EU cohesion or whether they will further expose internal EU tensions. Brexit tensions already pose risks to the very core of the transatlantic and the intra-European security and foreign policy alliance. This all leads to a weaker global EU strategic presence at a time when the U.S. is already suggesting heightened risks of withdrawing from its leadership role.

So in light of all these strategic uncertainties, it's fair to ask whether they rise to the level where the basic framework under which policy and political decisions are made globally really does need to be questioned. Or, is the perception of global structural instability simply an overreaction to a series of one-off events? Are the early missteps of the new U.S. administration and the president now past history? Is 2017 back to normal, or are we back to something more fundamentally structural and systemic? In short, are these really just instances of traditional political risk, or are we really in full-blown uncertainty territory?

The problem with forecasting major geopolitical structural shifts is that they take place over a much longer time frame than markets and businesses expect—especially in the current era of instant technological gratification. Big political cycles play out over decades, major political turning points occur every 75 or 100 years or so, economic cycles play out over far shorter time periods. And in any case, does the distinction between normal events of political risk, and more fundamental geopolitical shifts, matter? Fundamental uncertainty about the stability of the world order should be of concern to markets for one particular reason: that is, that in assessing whether and when, on the back of any given political event, things will go back to normal. And by "normal," I mean a framework for making investment and business decisions based on more or less predictable assumptions of geopolitical stability: established institutions, recognized trade and economic norms, an overall framework through which to assess a range of predictable outcomes.

If things revert back to normal, then we move away from uncertainty and toward more traditional political risk. If there's no fundamental shift, no global trend. Then even after unexpected shocks we'll be safe to revert back to expectations consistent with the recent history of market reactions to political events—which reactions have been short. Financial markets often recover from even significant political shocks, like 9/11, within three to six months. These days, cycles seem to be measured in days—sometimes even hours. But consider these few examples when asking yourselves about fundamental shifts that could force us to question those basic assumptions, that perhaps make it less than certain that things quickly revert to normal.

How firm is U.S. support for the centrality of institutions like the G20, the IMF, and the WTO [World Trade Organization]? What did the U.S. mean by deleting its insistence on the leading language that rejected protectionism and rules-based decision making from international communiques at recent G20 and IMF meetings? Is the U.S. ready to risk starting or escalating a global trade war so as to satisfy a domestic political constituency? What did Secretary of State Tillerson mean last week when he announced that U.S. values would no longer serve as a component of U.S. foreign policy decision making? Which values are no longer important for U.S. interests abroad? And how can U.S. actions be predicted or prioritized if policies are set on a value-neutral, transactional, and ad hoc basis? How solid are U.S. security and treaty commitments? Will they, in fact, be honored, if challenged directly or indirectly? What is the future of the European Union? Dutch and French elections have thus far provided more pro-Europe outcomes than feared, and German elections are likely to do so as well.

But deep, structural tensions remain over the future of the EU, and how to deal with European economic and political dissatisfaction, increasing nationalism, fragmented defense capabilities, stubbornly high unemployment, Brexit negotiations, Italian political, economic, and financial stability concerns, and much more. Now in spite of all these big questions, and for all the uncertainty that I've just referred to, investors seem to have discounted them all. Global growth is up, stock markets are at record levels in the U.S. and broadly positive all around the world.

This represents a real division. On the one side, there are those who see the current political events as representing a broader, unsettling trend, characterized by uncertainty. The two anchors of the current world order—the U.S. and the EU—are simply less reliable than they had been in the past. A weak and insular Great Britain, a rising China with uncertain intentions and ambitions, an erratic, nuclear North Korea, and a mischievous Russia, undermining overall confidence. To the foreign policy crowd, the world is an increasingly dangerous place, filled with unknowable outcomes resulting from potentially historic geopolitical shifts.

But on the other side are financial markets, which seem to be either convinced that individual political events do not represent an overall threat to existing norms or which resolve uncertainties by pricing in the upside of opportunities, but largely ignoring the risks of highly uncertain outcomes. Besides, if everybody is ignoring these risks, while the music is playing, dance on.

So how to explain this dramatic disconnect? In part, it's because we are all creatures of our own experience. Since 1990 and the end of the Cold War, the world has experienced an exceptional period of relative global political stability. This is not to argue that there have not been wars and conflicts, especially in the Middle East. But at a fundamental, geopolitical level, since the collapse of the Soviet Union, the world has been largely stable. The current generation of financial market actors is simply not accustomed to thinking about major systemic political events that could alter fundamental assumptions and outcomes. Markets have gotten comfortable pricing emerging-market-country risks. But more fundamental risks at the global or structural level are not easily calculated and often not even considered. These more intangible risks of political outcomes are difficult to quantify. They are difficult to integrate into models.

Now if anything, it has become harder—not easier—to quantify geopolitical risks. In the past, the most relied upon indicators of geopolitical risks were seen through oil prices, sovereign spreads, and exchange rates. Today, oil prices are no longer seen as a telling barometer of global risk. Sovereign spreads and exchange rates have been significantly impacted by the past decade's ultra-loose monetary policies, which have affected investors' perceptions of risk and of central bank intervention. Given the failure of many fiscal authorities to have acted post-crisis, central banks became the only game in town, and investors increasingly took for granted that central banks would step in and keep things stable regardless of political events. If a political event was considered positive, markets would respond by moving up. If a political event was a negative, central banks were assumed to be ready to step in and provide a floor to any decline.

Now, that is not a bad thing for markets or economies. But it means that it is hard to know whether financial markets are correctly assessing political and geopolitical risks or whether they are ignoring far more fundamental shifts that could lead to uncertain outcomes. Thank you. I'm told I can take questions.

First off-camera questioner: Yes, thank you very much for your points this evening—perfect timing, right before the Korean election. There are a lot of folks—ex-military folks would actually beg to differ, in terms of the three folks in the Secretary Defense seat: General Mattis, General McMaster in the NSA [National Security Agency], and Tillerson. At least from a lot of people's perspective, you have a very strong foreign policy team in place. And there are some countries that actually—a lot of allies—have actually greeted some of the recent actions and pronouncements of the administration very warmly, and with a lot of confidence. Today the VIX closed at 9.7, the lowest level since 1993—and that's just one of the market indicators that you alluded to, suggesting that maybe all of this concern around policy uncertainty is overblown. So I'd say there are other viewpoints out there. It seems...I know that you've been with Davos, but there are a lot of folks in DC—and I happen to be an ex-army guy, but—and I have a lot of friends in the military, they have a very different perspective than what you are articulating.

So I'd be interested in what your viewpoint is of General Mattis, General McMaster, and Rex Tillerson.

Rediker: So first of all, I don't know any of them personally, although I have met General McMaster in the past on several occasions. I want to be clear that the foreign policy team, as reflected by those you referred to, is strong. I also want to be clear that the way the U.S. government works is not solely on the basis of Cabinet secretaries. Deputies, undersecretaries, deputy assistant secretaries, assistant secretaries, principal assistant secretaries are crucial to the way the world of diplomacy and foreign policy works.

I was careful to say "sub-Cabinet positions" and not "Cabinet," precisely because I think it is a relatively strong team, you can throw in John Kelly as well, and others. But decision making in this administration is not, from what we're hearing, being made through a traditional interagency process. I'm not going to bore you all with the benefits and the process-driven interagency process, but suffice it to say, it is there for a reason. It is not there simply to make work. It is there so that on any given issue, all vested interests or interested parties and perspectives are heard. Almost all of that work goes on at the deputies level or below. The interactions between the State Department and their counterparts around the world are what day to day reflect this government's interaction with other governments.

So, to use an example. If you're going to—I had this in an earlier version of the presentation and I took it out, but—if you're going to make a policy pronouncement, you should anticipate what the reaction of the countries that are going to be impacted by that policy is going to be. In order to do so, the traditional means by which you would do that is you would have a briefing from, amongst others, the State Department officer who is responsible for that country or those countries. That is not happening.

So it is not a question of criticizing the individuals in the military positions or even in the Cabinet positions. But I can tell you that the morale at the State Department right now is probably as low as it has been, certainly in my lifetime, maybe in a hundred years. And that is in part because, in the initial proposal to cut the State Department's budget by 31 percent, the current Secretary of State did not stand up and advocate for his building, for his department. He in fact said, "Yes, let's talk about it." That is not the way to engender the support of the 80, 90, 150,000 people that work at the State Department.

Now, you can argue—and I was in the government, so I will argue—there is a need to make the government more efficient. I'm the first one to tell you, coming from the private sector, when I joined the government I was...surprised. [laughter] Having said that, the assistant secretaries, the undersecretaries, the deputy secretaries, the deputy assistant secretaries in the State Department are not where the problem is. And to try and manage a foreign policy without filling those posts means you are fighting without your full knowledge base and without your full set of tools. That causes concern not only in the decision-making process, but with the signal that it sends to every other country that says what's going on. I can tell you that rumor—I don't know this, but that what I have heard—is that our embassies and our diplomatic personnel are watching Sean Spicer's press conferences to find out what U.S. policy is on issues so they can relay that to their respective country officers that they are interacting with. That is not a way to run an efficient foreign policy.

Jim Bullard, second off-camera questioner: Jim Bullard, St. Louis Fed. I'm often told as a monetary policymaker that uncertainty is particularly acute at this juncture. [laughter] So I'm going to force you to quantify here a little bit, I'm going to give you some other places and times, other times, and see what you think.

So, let's say, March 1981, that would be one. Let's say October 2008, that would be another. And then July 2012, before Mario Draghi—that would be a third. So where are we on the scale of those three, if you think uncertainty is high right now?

Rediker: I would argue that those were all events that are not geopolitical structural shifts. If you had said 1989, 1990...

Bullard: Do you think, even 1981...?

Rediker: No. Because you had the Soviet Union, you had China, you had the U.S., you had...you did not have what I would consider to be a geopolitical shift that affected the structure of the institutional framework within which decisions are taken. So I would argue World War II. I would argue the fall of the Soviet Union...possibly. And I say "possibly" because, to some degree, there was such a dichotomy between the Soviet bloc and the non-Soviet bloc that you could sort of say that that part didn't matter because the interactions financially and economically were reasonably constrained.

So it was the opening up of those markets that was a structural shift, but the IMF continued to play a role—we had the GATT [General Agreement on Tariffs and Trade], we didn't have the WTO—but we had institutional framing that had been established post-World War II. So again, the events that you describe are huge political risk events—huge—and they cause huge uncertainty. But I would draw a distinction between those that I was trying to allude to, maybe too gingerly, in saying if, in fact, this administration follows the path of walking away from Bretton Woods treaty commitments, then I don't believe that markets have even fathomed the concept—nor do I believe this is likely to happen. I want to preface this by saying, I don't believe this is likely to happen—but if you look at the rhetoric that has come out of both the president and some of those around him, then you cannot totally discount the idea that the U.S. could say, "We're not going to fund our commitments to the IMF anymore—and by the way, we are no longer going to support the institution, and therefore..."

That's not going to happen, but it could. And I'd say six months ago, "That's not going to happen" would have been where I would have stopped that sentence. So the uncertainty about what happens if—somebody asked me earlier today, that there was a rumor (which I think is a ridiculous rumor, but nevertheless) that Christine Lagarde was going to be Emmanuel Macron's prime minister. No, I think that's not going to happen. Just to be clear, somebody said that, and I said to them, "That's not going to happen." I hope it doesn't happen tomorrow, or I'll look foolish—but nevertheless. [laughter]

OK, on the basis that that's not going to happen, fine, but the premise of the question was, what happens if she does leave; who takes over her spot? Then, you know, it's interesting, because of course, since the creation of these institutions, the U.S. has had the chair of, the presidency of, the World Bank, and Europe has had the chair of the IMF, but that is subject to a lot of stress. So now imagine a situation in which Lagarde leaves—which she's not going to, but just for a thought experiment, she leaves—now there's this huge battle, and the Trump administration says, "Well, we want our guy, we don't care what protocol was in 1947, we want an American to be the head of the IMF."

And of course, everybody else says no. So what happens in that scenario? And again, this is one of those things where you've got to let your imagination run wild, because I think none of this is likely to happen, but the fan chart of possible outcomes here is astonishingly wide because the story I'm telling now—which, again, is just a story, it's hypothesis, it's not going to happen. But for the first time in my lifetime, it could. And that's the uncertainty that I'm referring to. I would draw a distinction between prior instances in which we had significant seismic political risk, from really shaking the foundations that people think about as being solid and absolutely unchallenged, and I think we have to at least consider that they could be challenged.

Third off-camera questioner: Just in terms of the disconnect you're talking about between markets and these risks—obviously, the equity market is reflecting one set of events, but if you look at the interest rate market it's something else. Perhaps that might be a better reflection. I don't know what you think about that, but if you look at crises over the years—the reaction to 9/11, LTCM [Long Term Capital Management] in 2008—is that interest rates have always fallen in such an event, and so perhaps investors are positioned through that vehicle for some of the risks that you're talking about, and not necessarily through the equity market.

Rediker: Again, this is what I would consider to be well within the normal parameters of markets doing their homework, assessing risks, quantifying those risks. Absolutely within the bounds of reasonable hedging strategies, reasonable positioning in terms of FX movements, absolutely, markets as we know them. I didn't mean to imply that anybody who takes a position contrary to the fact that everything's always going to go up and it's going to be sweetness and light is somehow deviating from the norm. I'm making the point that, for now, the huge structural risks are things that people aren't thinking about. And I'm not suggesting...I tried not to say I was coming out on the side that you have to, I'm simply saying you have to be aware that you're making a conscious choice to go back to a comfort zone in which institutions, geopolitical balance, the U.S. role in the world, the rule of law—all that good stuff—remains largely as is.

And I'm simply making the point that that's fine. Be aware that whether it is the future of the EU, China, others, all of those are somewhere between contributors to global uncertainty and normal political risk, but that the unpredictability of the current U.S. administration poses far greater uncertainty than we are comfortable with. I can't answer what that means, which is precisely why I drew that distinction between uncertainty and political risk. Thank you.

Gooding: Thank you.