The big systemic risk - the need for stability and order

Government institutions fail when they cannot clearly communicate the realities that surround them. These institutions fail when they do not realize that in a real politic environment - there is always a play for power and a focus on self-interest. Government institutions fail when they don't provide stability and order both for those being governed and across institutions. These institutional failures are the real geopolitical systemic risk which should be the concern for investors. Tail risk events are often the result of institutional failure not the cause.

Systemic risk usually focuses on connectivity, technical details, and specific market failures and not broad failure of governing institutions.  Yet, the stability of the global order provides an environment for other more micro issues to take center stage for investor concerns - which is a good thing. When the global order is disrupted, there will be less investment and.  a flight to safety because the animal spirits of optimism are curtailed. 

Perhaps not so hidden in the pandemic is a turning away from experts and government institutions. Whether on the local, national, or international level, the lack of confidence in the current order will have an impact on financial investments. 

How can rising systemic risk be the case when we just had equity returns (SPY) of close to 27 percent for the year? Fiscal and monetary largess with pent-up demand was able to mask declining confidence, but globally there is less confidence in governments being able to articulate and address crises. The institutional glue that will bind behavior in a crisis has weakened which increases systemic risk. The failure of order at the local level will then play-out across countries. 

Unfortunately, this cannot be easily measured or isolated through some quant model. This is the essence concerning animal spirits and investment confidence. There is no easy measurement of optimism in the face of uncertainty. For Keynes in the 1930's, it was the role of government to prod aggregate demand and get confidence rising. However, if there is less confidence in potential solution providers, the threat of systemic failure increases. Yes, while this is pessimistic, discussing the systemic risk framework is critical for any 2022 predictions.