Why are Financial Markets So Bad at Pricing Geopolitical Risk? | A Conversation with Rachel Ziemba

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In this Market Forces segment of the Hidden Forces Podcast, Demetri Kofinas speaks with Emerging Markets Analyst Rachel Ziemba. Rachel leads Emerging Markets coverage for Roubini Global Economics and writes extensively across all three EM/Frontier regions, as well as about commodities. She has a particular interest in the macroeconomics of oil-exporting nations, including the management of oil wealth, energy-sector supply risks, and China. Ms. Ziemba also does extensive work on global macroeconomic issues, particularly foreign-exchange reserve accumulation, sovereign-wealth management, and economic imbalances. Prior to joining 4CAST-RGE, Rachel worked for the Canadian International Development Agency in Cairo, Egypt, and the International Development Research Centre in Ottawa, Canada. Rachel has served as an expert commentator for Bloomberg, CNBC, the Financial Times, the Wall Street Journal, and other media outlets. Her research has been cited by the Economist and in papers from the IMF, World Bank, European Central Bank, and U.S. Federal Reserve. She has served as an expert member of task forces in the U.S, and the UK on issues ranging from economic sanctions, Chinese security challenges, Egypt and sovereign wealth funds.

In this almost hour-long conversation, Rachel Ziemba speaks with Demetri Kofinas about some of the most important phenomena impacting markets. The conversation begins with a look towards North Korea and the geopolitical crisis that is unfolding on the Korean Peninsula. What has been the verdict, thus far, in financial markets? Why are financial markets so bad at pricing geopolitical risk? Is this a problem of too little information? Do governments even have a firm grasp of the evolving geopolitical crisis in North Korea?

The conversation then shifts to the falling dollar. What has been driving the fall in the dollar since the beginning of 2017? Have we seen a bottom or could the dollar fall another five, ten, or even twenty percent from these levels? The greenback has fallen despite a further drop in yields on 10-year and 30-year US treasuries. This is particularly relevant in light of the dollar carry-trade, which has benefited from the Federal Reserve's policy of low interest rates in the United States. How has the dollar's role as a funding currency for emerging markets played a role in the recent rise in equities and bond prices in some of these markets? What can forward volatility and the price of currency swaps tell us about the risk of a snap-back in the dollar carry-trade?

Finally, Rachel and Demetri discuss energy markets, specifically the chronically low price of oil and its effects on the oil and natural gas industries in the United States, as well as those abroad. In particular, the two discuss the case of Saudi Arabia, with its dwindling foreign exchange reserves and fragile geopolitical position.

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