Domino

Please enjoy this short but special episode of Domino.  The following is the introductory chapter to Brady's book, In Light of Yesterday, in which he discusses a phenomena known as the butterfly effect – which can be used to understand the strange chain of events that led our global economy to look the way it does today.

In this episode, the guys explore the comically bad predictions of past economic forecasts and discuss why the economy is so difficult to predict.

How did the Federal Reserve begin? Well, it all started with one top secret meeting at Jekyll Island, Georgia...a meeting that set the foundation for what would become America's central bank. Those men probably didn't realize the power they held in that meeting that would go on to change the future of the American economy.  In this episode, we explore the role of the federal reserve and their impact on the economy.

Politicians developed a metric known as GDP, or Gross Domestic Product, during the depths of the Great Depression to help measure the strength of the economy.  GDP become something of a scoreboard for countries around the world and gave politicians a measure stick to gauge the impact of policy decisions.  In time, increasing GDP became a national obsession and drives decision making for our leaders today.

Trade wars aren’t new.  You may recall Ferris Bueller took a day off from school and in the process missed Ben Stein’s now famous lecture on… anyone, anyone?  Tariffs.  There have been several notable eras of trade wars over the past century. From the days of Smoot Hawley and the Great Depression, tariffs on all kinds of goods have impacted economic activity around the globe. Donald Trump has made it clear he and his administration want to take on China through tariffs.  Who wins this trade war?  Only time will tell, but in this special episode of Domino we examine the impact tariffs have had on our economy, the US consumer, and even chickens.  And we take a look forward to see how this round of negotiations may shape the future of global trade for generations to come.

From the outside, China appears to have discovered the fountain of unending economic growth.  But is it really just a mirage?  Did China purposefully create their own real estate bubble to avoid the global economic slowdown in 2008 / 2009?  Why do massive cities still sit empty years after their creation?  This week we examine the strange and misunderstood world of China, and how government owned enterprises are providing the illusion of growth with high ever-increasing debt.  Could China be the next Domino to fall?

Could a speech about bumblebees solve Europe’s economic woes? Is it possible for nineteen countries to share a common currency? What happens when interest rates go negative?  Europe is one gigantic economic experiment with complexities that few understand.  This week, we examine the history behind the current European economy as well as the challenges that they may face in coming years.  And we finally address the question, are Italians bad at budgeting?

Aside from the staggering losses suffered by investors, 2008 is best remembered for the shocking fall of Wall Street titans Lehman Brothers and AIG.  One company was bailed out by government money, the other was allowed to fail, resulting in the largest bankruptcy in history.  The story behind the collapse of each firm began many years earlier, with a change in risk management policies.  The subsequent decision of ‘who to save’ serves as a valuable lesson: don’t burn bridges on Wall Street.

No hedge fund in the 1990s made bigger waves than Long Term Capital Management.  In 1996, their profits exceeded the net income for Disney, Dell and Nike... combined.  Using sophisticated computer models and massive leverage, LTCM made billions of dollars for their investors and the fund’s partners. In 1998, circumstances changed, causing the fund to implode in an epic meltdown that threatened the very fabric of Wall Street.  The Federal Reserve finally stepped in to orchestrate a bailout.  A new phrase was born on Wall Street - “too big to fail.”

  American companies poured billions into Thailand in the mid-1990s to utilize the country’s young, educated workforce.  Investors saw the developing country as an economic fountain of youth, and Thai companies took advantage of a fixed exchange rate to borrow funds in US dollars.  In time, the economy slowed, investments fell, and money began to leave the country putting pressure on the baht - Thailand’s currency.  A savvy investor named George Soros watched the story unfold and made an untold fortune by betting billions against the collapse.  

Proponents of the North American Free Trade Agreement described the trade deal as a win-win for everyone.  Those in opposition argued that Mexico would be the only winner from the inflow of factories and jobs.  Both sides were wrong.  What was supposed to be a clear victory for Mexico turned out to be a nightmare with Mexican consumers abandoning local products in favor of American-made ones which sent the Mexican economy into a tailspin.  The real winner?  Arkansas based retailer and NAFTA proponent: Walmart.

In the 1980s, Japan was poised to become the next economic world leader.  Books were written about their work ethic, financial innovation, and management styles.  From luxury cars to VCRs, Japanese manufacturing was more efficient, more advanced, and frankly more profitable than American companies. For many economists, it was a near certainty that Japan would soon surpass the US as the largest economy in the world.  But something strange happened.  Japan’s hot economy suddenly turned south, their real estate market imploded, and their economic golden years crashed and burned.  Now it looks as though Japan’s best days might just be behind them.  

In a surprise move, President Nixon announces an abrupt end of the convertibility of the US dollar into gold.  With the unbridled freedom to print money and spend, the country adopts a more-loose-than-usual monetary policy that inadvertently spurs inflation.  As the dollar weakens, concern mounts about the long-term viability of the dollar until Treasury Secretary William Simon and Secretary of State Henry Kissinger strike monumental deals with Saudi Arabia and OPEC to secure the dollar's status as the world's reserve currency. https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret

  A fortunate discovery by a Mexican fisherman uncovers the largest oil reserve in Latin American history.  Spikes in oil prices shortly thereafter coupled with easy access to loans triggers a spike in borrowing throughout the region.  The euphoria would be short-lived.  Just as it appeared Latin America's day in the sun had finally arrived, interest rates spike, leading to massive problems and hardship.  Health standards plummet, the economy contracts, and the illegal drug industry booms as the regional economy implodes. Teetering on the brink of disaster, Latin American governments and American banks are faced with difficult decisions of how to rescue the failing region.  

Beginning October 25, we will examine eight different events that altered the global economic landscape and the cascading impact on the next. Join us as we take an entertaining and educational journey, beginning with the Nixon shock in 1971 and the Latin American debt crisis that followed. Each week we will launch a new story to examine the ripple effects that followed.

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