With the return of the highly unpredictable Donald Trump as US President this month, how should anyone manage his or her risks? We define risk as the possibility of the occurrence of an event or condition which, if it occurs, would negatively impact our well-being. We scan risks in order to try to avoid or mitigate such risks.

Those who have wealth care the most because they have the most assets to lose. The first thing to remember is risk cannot be eliminated, only managed or hedged. In a static zero-sum system, one man’s risk is another man’s opportunity. You squeeze one side of a balloon, it will expand on other sides. However, the balloon may burst or leak, so such risks are not improbable. In a dynamic environment, the balloon is ever expanding, and any action by one party could affect not only other parties, but also the balloon (system as a whole) itself. There are always costs to hedging risks, and if you choose the wrong hedge, you could lose even more when an unexpected event occurs.

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The World Economic Forum’s Global Risk Report 2024 (published last January), based on a global risk perception survey of 1,500 experts, was remarkably comprehensive in laying out the fears of a rapidly accelerating technologically changing world beset by climate warming and conflict. In the short-term (two years), the top risks ranked by severity were misinformation and disinformation, extreme weather events, societal polarization, cyber security and inter-state armed conflict. Over a ten-year horizon, top risks include extreme weather events, critical change in Earth systems, biodiversity loss and ecosystem collapse, natural resource shortage and misinformation and disinformation.

Surprisingly, involuntary migration, interstate armed conflict and geoeconomic confrontation were ranked 7th,15th, and 16th respectively over the next ten years, whereas at the end of 2024, migration, nuclear war risks and tariff confrontation all surfaced as headline concerns affecting elections and geopolitical tensions. As polarization occurs, misinformation and disinformation by warring factions caused a huge loss of trust in governance, resulting in populist and “strong men” leaders who promised to stabilize life for the confused electorate. Trump is promising to end the Ukraine war and seeks to have transactional deals, using the threats of tariffs on allies and enemies alike. Even as the fate of Ukraine and Gaza/Syria depends on the outcome of who is really winning the armed conflict, with Europe being the biggest economic victim in terms of growth, the big picture depends on whether Trump can stabilize the US-China geopolitical rivalry.

The United States leads in GDP at market currencies at US$29.2 trillion against China’s $18.3 trillion, together accounting for 43.2 per cent of the 2024 global GDP of $110 trillion. In purchasing power parity (PPP) terms, however, China leads with $37.1 trillion, whilst US has $29.2 trillion, both accounting for 37.3 per cent of world GDP of $185.7 trillion. India is ranked 3rd at $16 trillion and Russia at $6.9 trillion, whereas in market currency terms, India and Russia are ranked 5th and 11th respectively. With technological, military, economic and financial dominance, the United States still has a deciding edge in terms of power say, even as China has emerged as the leading manufacturing and trade power. As Trump has clearly recognized, American power rests on the mighty dollar, a position that the United States must defend.

The irony is that the more the dollar is weaponized, the more its global users feel uncomfortable for fear of sanctions, freezing, confiscation or medium-term devaluation. The recent CF40-Peterson Institute of International Economics conference showed how rational, scholarly and professional economists are trying to figure out ways to manage trade and tariff tensions on both sides, even as political rhetoric is reaching alarming levels. One of the most respected China economists, Professor Huang Yiping, explored potential outcomes, from fighting a full-blow trade war, China buying more from the US, voluntary export restraints, to decoupling in selected sectors and RMB appreciation (Plaza Accord II). The Peterson trade economists are predicting that tariffs will cost the United States in terms of higher manufacturing and import costs, with impact on inflation. If a full-blown trade war occurs, the world could be sent into a protectionist recession. If you want to be scared by nuclear war, read the just published US Defense Department’s China Military Power Report 2024. How are financial markets reading and hedging these global risks? The US stock market is at all-time highs, with the NASDAQ index up 29.1 per cent year to date (YTD), whilst the Dow Jones Index is up 15.3 per cent. Bitcoin is up 137.9 per cent YTD, whereas gold surged over 28 per cent.

In other words, with huge uncertainty in the geopolitical situation, financial markets have become speculative, as investors seek higher risk, short-term returns, even as the Fed has cut interest rates four times since September but hinted at only limited cuts next year. Since the Fed has begun cutting interest rates, the S&P US Bank index has delivered returns of 35.67 per cent YTD. Singapore bank stocks are up over 40 per cent YTD, with dividend yields of around 5 per cent per annum. So, risk-adverse investors holding bank stocks have been rewarded just as much as those holding frothy tech stocks. In sum, the global risk picture looks fraught with shocking events and dramatic turns almost daily. Trump 2.0 will add to the bumps. And yet, the largest economy in the world is still printing money to finance its trade and fiscal deficits.

Thus, in dollar terms, investors are stuck between greed and fear. As long as the Fed has to cut interest rates to reduce the US fiscal burden, global investors will continue to bet on the financial sector leverage play. Will it all come to grief? The American economist Herb Stein said, “If something cannot go on forever, it will stop.” But the music will not stop because reserve currency central banks can go on printing money to finance unsustainable fiscal deficits. So, enjoy the frothy music while it lasts.

(The writer, a former Central banker, writes on global affairs from an Asian perspective.)