Black Swan Down

Uncertainty Up

The world is suddenly full of uncertainty: tsunamis, nuclear threats, civil wars, regime changes and sovereign debt default are all high on the agenda. Yet, despite this plethora of potential pitfalls, markets have remained remarkably sanguine, for the most part.

We should expect, surely, that sudden and frightening events such as these, some of which at least are genuine Taleb style Black Swans, should send investors and markets into a dramatic tail-spin. Yet it ain’t so, and there’s a lesson here, which is that markets aren’t moved by events in quite the way we think they are.

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Springing the Liquidity Trap

Bad Omens

We’re in the middle of one of the most dramatic experiments financial markets have ever seen. Central banks, across the world, have bet your house and mine on a gamble of extreme proportions yet, such is the unpredictability of markets, we’ll only know the outcome of this with hindsight, a notoriously unhelpful bedfellow.

The problem is that changes in monetary and market liquidity can trigger outbreaks of investor insanity and by pumping the world full of cheap money central bankers are gambling that they can manipulate markets to beat behavioural biases. The omens are not especially good for them getting this right.

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Panic!

Economic Stability Is Not The Norm

The exceptional market conditions of the last couple of years are a reminder that we should regard stable markets as a pleasant interlude rather than the normal state of affairs. In general, of course, people tend to expect tomorrow to be much the same as yesterday and to behave as such. It’s little wonder, then, that when everything goes wrong people start to panic, assuming the world is coming to an end.

Of course, so far, the world hasn’t come to an end – although a lot of people have lost lots of money in the meantime. What we can see from history is not that market panics are exceptional but that they’re the norm.

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