It says a lot about the state of the world economy when ideas dictated through extreme political leaders have populist appeal to them, and are what is driving the promotion of regressive economic policies. How these ‘populism ideals’ are beginning to trump (no pun intended) simple textbook economics paints a rather alarming picture. Certainly this is nothing new. We saw the emergence of this theme at the beginning of the European Sovereign Debt Crisis in 2011, but this nonsensical populism was taking place in what are relatively smaller and, without offence, insignificant economies, (such as Greece), to the world. Then, it was more a story of shock than significance. It’s unfortunately a theme that has gathered momentum.

What started in Greece then spread to bigger countries like the PIIGS (Portugal, Ireland, Italy and Spain), and Poland and France. We saw the emergence of far left or far right wing parties where platforms were founded on a sense of nationalism, communism, or religious ideals are gaining support and interest. In some countries, a vote could be split enough ways to keep a somewhat centrist regime in power, others didn’t see the same fate.

Now we have two key events in 2016 (one only a few weeks away), that have the ability to shape a real turning point in the direction of the global economy. And the reason for their significance is because this rise in populism from smaller and less significant economies has made its way to the main stage. The first upcoming event is the ‘Brexit’ referendum which takes place on the 23rd of this month. The second is the Presidential election in the United States this November.

Regarding Brexit, a first year college student could make a very simple argument for why Britain should remain in the Eurozone. At the most basic of levels the participation in a market almost equivalent in size to the United States makes British consumers better off vis-à-vis more competitive prices when they purchase goods at home. The same works for businesses selling their goods and services to a vastly larger market, saving duties and customs fees. With the instance of less restrictive barriers to trade, there are always losers, but the economy is better off in aggregate and a responsibly managed one compensates losers.

Another argument against ‘Brexit’ is the ‘yes’ voters don’t know what they are voting for should Britain leave the EU. Uncertainty plagues their side, as the most common concern is the future of the financial services industry based in London. And on that topic, uncertainty is about all the parallel’s one can draw to a US election, come November, that defies any allusion of normalcy. That’s simply because it’s unfortunately been a story more consumed for entertainment value than anything else than serious political consideration.

Some may attempt to just write these two major events of 2016 off as anomalies that will simply fail and go away. We’ll see, but it is highly unlikely. Unfortunately, is clearly a discontent in the perception of the way this world operates is what’s fueling the beast. Populism doesn’t care about right or wrong. And as investors, that’s a problem because markets can become just that much more unpredictable and volatile. Is there an answer? No, but a little diversification always helps.

Hindsight is 20/20. That being said, 2015 saw a bull run in the US dollar that was forecast by many credible analysts. The year also saw commodities tumble and other assets that are negatively correlated to the US dollar show weakness, particularly the Canadian dollar.  Now, looking ahead to 2016, the Bank of Canada is no longer viewed or anticipated to be more accommodative. The federal government has planned stimulus spending to ‘invest’ in the Canadian economy. And surprisingly, we have seen somewhat strong economic indicators in the first few months of 2016 despite heightened levels of uncertainty from the global economy over same time period.

It’s worth reconsidering what factors drove the loonie and oil prices to the levels they are today. A major contributor to sharp movements in the global currency markets was the US Federal Reserve out in front in terms of tightening monetary conditions. With steadied and continued improvement in the US labour market, the Fed prepared to gradually raise their key policy interest rates. And, with regards to commodities markets, the world economy faced both weakening demand, particularly from China and the emerging economies and an oil supply glut that focused heavily on shale production in the US.

The reason it’s worth revisiting those two aforementioned factors that caused such disruption for global markets, is because they currently remain at the forefront of what’s driving investment markets. Janet Yellen was speaking at the Economics Club of New York this past week, and seemed to do a course change on how the Fed views international developments. What was previously not a concern of the US Federal Reserve and just a mere acknowledgment in their prior policy statements suddenly became a focal point of Ms. Yellen’s speech. Following the Fed’s initial rate hike in December, anticipation was for four additional quarter point moves this year.  Now the question is whether there will even be two.

Regarding commodities, there is still clouded uncertainty over whether OPEC members will come together to cut production levels and assist in putting a floor under the oil market. This question will have greater clarity by the middle of this month when OPEC and Non-OPEC producers meet, but at this time oil prices are a factor that continues to weigh on commodity markets, as the possibility of lower prices is continuously debated.

This in essence represents Yellen’s paradox, and it seems she is willing to delay and shift back to a wait and see approach. Her enigma is heightened by the fact that a strong US dollar stemming from central bank policy in tandem with a supply glut in commodities led to dogged market volatility. Many of her fellow Fed members have been vocal these past few weeks, and appeared ready to continue to hike rates. Other members, including Yellen, have seen how a strong US dollar has challenged the US economy with the expectation of a Fed rate anticipated with a vibrant US labour market. While waiting, however, the Fed risks their credibility of being able to raise interest rates as they had previously guided investors to believe.

If the Wednesday morning bank of Canada announcement revealed anything, it’s that Canada and Stephen Poloz may be shifting course to join the group of central bankers that are no longer attempting to save the world. Furthermore, they have accepted that the year ahead will be one of slow and tepid in terms of economic growth. As the first month of this year is already shaping up to look fairly ugly for the markets, we are constantly reminded of the troubled outlook for the global economy by consistent downward revisions for economic growth, as the most recent one came from the International Monetary Fund at the beginning of last week.

Harvard professor and former IMF Chief Economist Kenneth Rogoff said exactly that in an interview with Bloomberg from Davos, Switzerland at the World Economic Forum. Where people may be looking to central bankers to save the world and contain some of this market volatility, expectations should perhaps be paired back as we begin a year of expected moderate economic growth and wild market volatility. Central bankers will only concern themselves with market volatility if they begin to see evidence of a transmission to the real economy.

But back to Canada, a year on, it’s safe to suggest the challenges facing the Canadian economy have become that much broader and a little more complex. For example, the bank of Canada refers to slack and deflationary pressures from lower energy prices, and the toll it takes on Canadians and businesses linked to that sector. Challenging from the other side will be inflationary pressures from rising import costs hitting consumers on everything from groceries to electronics.

Finally, there is also a concern of a currency that mirrors some of the instability of the world’s emerging economies. This in particular has Canadians with strong business ties to the US either cheering as they get paid, or on the edge of their seat as they see margins slip away.

There is, however, a case for the Bank of Canada cutting interest rates a little further into 2016. A few important aspects they may be looking for are the degree of fiscal stimulus from the Federal Liberal’s first budget and where oil prices may settle going into the spring. However, as long as oil prices and the dollar keep slipping, I am of the view the weaker currency will do the bank of Canada’s heavy lifting for them, and they will not need to lower rates. But to quote the governor in a speech earlier this month, “the economy’s adjustment process can be difficult, and painful,” and unfortunately certain regions and aspects of the Canadian economy are in for just that.