Domino Effect and Contagion

The week ended on August 22, 2025, interesting news items to look at this week are:

Domino Effect and Contagion: The domino effect occurs when one event triggers a chain of related events, much like falling dominoes. (Fig. 1)

This can happen in various environments—from global finance to politics to failure of nations. In contrast, contagion is the spread of a disease, risk, or idea that can involve various transmission channels and often leads to similar outcomes but isn't necessarily a direct cause-and-effect chain.

(i) UK the first Domino: There has not been much good news in the UK. (a) Firstly, the grand plan to fragment Russia into 41 separate states with a view to a looting of Russia’s wealth came unstuck (Fig. 2).

Trump struck an off-ramp deal with Putin to extricate US from a losing proposition in Project Ukraine, thus leaving major NATO European countries in utter panic. (Fig. 3).

(b)Then, millionaires are leaving the UK in droves like rats deserting a sinking ship. (Fig. 4).

(c) A constitutional crisis is brewing for PM Stramer to resign after a Supreme Court finding on Starmer’s involvement in a financial scandal. (Fig. 5).

(d) Admist all the turmoil, UK Gilts had lost 32.6% in value from its peak since 2020. (Fig. 6).

Almost the worst performer in Western developed economies.

(ii) Yen Carry Trade: We have repeated many times in this Blog, every Central Bank that practiced “Quantitative Easing”  through suppression of duration interest rates (using currency issuance to purchase government bonds at higher than market prices) are now trading fraudulently. These Central Banks (The Fed, BOE, ECB and JCB) all have liabilities exceeded the value of the assets they hold, e.g. As at August 20 2025 the Federal Reserve realized losses on its Bond Portfolio was $229.65 billion, far exceeded its Capital and Surpluses of $45.7 billion. (Fig. 7).

In those period of ZIRP and NIRP, Hedge Funds borrowed trillions in Yen at NIR to buy US Treasuries, Equities and assets for yield enhancement. By 2024 as global interest rate and Japan domestic inflation rose, the Yen Carry Trade blew up in August 2024 which caused panic and gyrations in the global financial markets. With the 2025 Reciprocal Tariff War, we are waiting for the next shoe to drop when uncertainties and market volatility become serious hurdles on trade and investment flows. Data points on Japanese Banks offshore exposure as at end of 2024 was a staggering US$11.6 trillion of which $999.8 billion was exposure to Cayman Island and similar offshore Centers. We expect a continued de-risking of currency exposures when Central Banks’ ability to control financial markets waned. Year to date DXY has declined by 9.57% with Precious Metals gaining 30%. (Fig. 8).

 What asset class are dominoes and what asset class can be quarantined from a contagion are the questions we need to ask and understand. Hope you will all find your answers after a restful summer break.

Ecclesiastes 3:1  To everything there is a season, A time for every purpose under heaven: 2  A time to be born, And a time to die; A time to plant, And a time to pluck what is planted; 3  A time to kill, And a time to heal; A time to break down, And a time to build up; 4  A time to weep, And a time to laugh; A time to mourn, And a time to dance; 5  A time to cast away stones, And a time to gather stones; A time to embrace, And a time to refrain from embracing; 6  A time to gain, And a time to lose; A time to keep, And a time to throw away; 7  A time to tear, And a time to sew; A time to keep silence, And a time to speak; 8  A time to love, And a time to hate; A time of war, And a time of peace.