I’m inclined to believe that those of us who fancy ourselves black swan watchers are in a better position than usual heading into 2017.
We are a skeptical bunch by nature but our inclination to be cautious when others are calm stems not from some ingrained cynicism, but rather from our belief that the illusion of equilibrium (i.e. low vol.) is just that – an illusion. We contend that the distribution of market outcomes is not normal nor will it ever be.
Indeed, we’re willing to take it one step further. We believe that risk is only priced correctly when something comes along and shatters the illusion of equilibrium. For it is only at that juncture that investors wake up to the fact that the world is everywhere and always an uncertain place.
As we usher in the new year we are in a unique spot. There are tail risks everywhere, but our swans are more grey than black. That is, we can point to quite a few specific pockets of risk that have the potential to completely upend markets, but unlike black swans, these risks are fairly predictable. And yet the market is not priced for them.
Recently, I’ve tried to touch on all of the identifiable landmines that lay ahead. But I’m often long-winded and have a tendency to wax philosophical to the detriment of conciseness. In a nod to “the whole brevity thing” (Big Lebowski reference alert), I present below an excellent summary of all that is likely to ail us in the new year.
Mood-setters…Excitement about Donald Trump’s presidency and a shift in the global monetary/fiscal policy balance; concern about China’s ability to keep the economy on track and control the pace of capital outflows; fear or further gains by populist politicians in this year’s elections, in France, Germany and Italy; A nagging sense that then bond market adjustment that is now underway has further twists and turns in store as borrowers and FX hedgers scramble for dollars. There are loads of emotions that can dominate the market moods in the days ahead, and lots to ponder.