On Dinosaurs and Dividends

Mass Extinction
Sixty-six million years ago an asteroid blew its way through the Earth’s atmosphere and detonated in what we now know as the Yucatan Peninsula in the Gulf of Mexico. The result was a mass extinction event which wiped out about 75% of the world’s species including all of the flightless dinosaurs. As Black Swans go, it was a biggie.

Right now investors are experiencing their own version of the K-Pg event, with whole countries going into lockdown as homo sapiens once more shows its surprising capacity to act collectively when faced with real and present danger. As a side effect investors are discovering that dividends are rapidly becoming an endangered species; but there again – does it matter?

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Be Prepared, Be Resilient

Are You Ready?

So, markets are down, the oil price is seemingly in terminal decline, the (alleged) Ponzi scheme that is the Chinese economy is collapsing and interest rates are on the way up. A crisis? Well, for anyone who’s been around the markets for more than two minutes it’s déjà vu, all over again.

Of course, the wise investor is prepared for this; not merely in the sense of having a trading strategy in place, but in terms of psychological resilience. There’s no point being the best darned stockpicker in the known universe if you flee for the hills at the first sign of trouble – or, even worse, at the last.

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Whither Forecasting? The Butterfly Stirs …

Weathered

Earnings forecasting is a triumph of accountancy over reality: given the complexity of most corporations an accurate forecast of earnings is logically, and numerically impossible.  Yet corporations guide and analysts analyse and, mostly, they all end up looking wise.

It’s all nonsense, of course.  The economy is a complex adaptive system comprised of billions of working parts.  The realistic chance of anybody predicting anything minutely accurate about anything of any interest is approximately zero, to several decimal points.  As any weather forecaster could tell you.

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How Sneaky Governments Steal Your Money

Debt Do-Do

Many nations in the developed world are in deep do-do with their debt levels. On one hand they need growth to earn their way out of their problems, while on the other they’re being forced into anti-growth austerity measures by markets, concerned about their spiralling interest obligations. It’s a grim position for those of us brought up to expect an unrelentingly rosy economic outlook.

This isn’t a new situation, though. We’ve been here many, many times before and governments have, by design and evolutionary accident, developed many, many ways of dealing with these problems. The cunning thing is that many of these involve stealthily thieving from their own citizens, but done so surreptitiously that, if we’re not careful, we won’t even notice it.

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Basel, Faulty?

Containment, Not Cure

The international banking regulations known as the Basel II Accord have come in for some stick, given the fallout from the banking crisis of 2008. This is, on the face of it, a bit unfair given that Basel II hasn’t yet been fully implemented in most countries and anyway was designed to try to head off some of the problems that have occurred.

Still, most observers reckon that Basel II wouldn’t have prevented the crisis and the tendency of regulators, like generals, to fight the last war means that proposed changes won’t help. Whatever causes the next crisis it won’t be the same as the last one and while regulators are busily building a Maginot Line to stop one kind of problem they’re unlikely to notice that they’re also incentivising banks to invade Belgium, or at least find a way to go around the new regulations. We need a new kind of regulation, one that recognises we can’t stop the disease, but that it can be contained if we act quickly enough.

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It’s Not Different This Time

The Smoking Cigar of Behavioural Bias

Not all failures of investment logic are based in human psychological flaws but, to paraphrase Freud, although sometimes a cigar is just a cigar mostly it’s behavioural bias. The smoking gun is almost invariably linked to people doing predictably stupid things. Like building shacks on earthquake fault lines, thinking they can banish risk with a spreadsheet and regarding the lessons of history as too remote to be interesting.

Sadly the fact that these things are predictable doesn’t make them any less easy to deal with. Our current set of financial woes is a wonderful test bed for those inclined to point to the short-termist biases inherent in the human conditions. We’d do well to enshrine these lessons in our systems now, because it won’t be long before we’ll start to forget.

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Black Swans, Tsunamis and Cardiac Arrests

Low Probability, High Consequence

On 26th December 2004 an earthquake off Sumatra caused a tsunami that sped across the Indian Ocean and led to the death of nearly 230,000 people. It was one of the deadliest natural disasters in recorded history. Despite the possibility of such an event being long acknowledged and the relatively low cost of putting early warning systems in place no such protection was available.

In the jargon it was a low probability, high consequence event and the failure to plan for it is a consequence of the human psychological focus on the predictable and short term to the exclusion of the unpredictable and long term. More colloquially the world had witnessed a Black Swan.

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