“All Bets Are Off”

Below, find two highly amusing messages from readers who apparently did not appreciate the line of reasoning I adopted in “Don’t Be A Monkey: Changing The Meaning Of ‘Actionable’ Research,” a popular post from earlier this week.

You can’t see it – that’s how it’s a black swan. If you can see it even a tiny bit, sorry to burst your little bubble – it’s not a black swan. You ONLY see black swans AFTER the event.There’s no real conclusions to draw here other than weird stuff happens and it might happen again. Or maybe not.Hmmm, thanks……real useful. NEXT!!!

So, there’s political risk? Does that have anything to do with technicals?
Personally, I like your articles/writing, but I despised this one.

Gotta love it.

Two (or twelve) angry men notwithstanding (classic movie reference there), quite a few people seemed to appreciate the message. Indeed, it’s the same message I’ve spilled a river of digital ink trying to elucidate this week. For example, here’s a passage from “Loads Of Emotions And Lots To Ponder“:

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.

I went on to argue that while black swans are by their very nature difficult to spot ahead of time, grey swans are “rare but expected,” to quote Nassim Nicholas Taleb. This gives us a opportunity to put on effective (and hopefully lucrative) hedges.

Below, find excerpts from a new piece by FT managing editor Gillian Tett. Tett argues that European political turmoil combined with the uncertainty surrounding Donald Trump’s ascension to the US presidency has effectively changed the way investors think about risk and uncertainty, blurring the line between emerging markets and developed markets in the process.

Tett’s analysis underscores the fact that we truly cannot overstate the importance of politics and tail risk as we head into the new year.

From FT:

Twenty years ago, when I was a rookie reporter, a colleague told me that the “problem” with emerging market assets was that they were irritatingly hard to value. That was partly because emerging markets suffered financial crises.

But the bigger issue was politics: emerging markets were more unpredictable than markets in Europe or America because they suffered from political risks such as revolutions, coups and capricious demagogues — or so the theory went.

How times change. A decade ago, investors were forced to rethink one of these assumptions when America and Europe were engulfed by the 2008 financial crisis. Now they are being forced to evaluate a second assumption, about political risk.

Most notably, 2016 was the year when western markets were rocked by political shocks almost as startling as anything seen recently from the emerging markets world. In 2017 investors will probably confront even more political risk in the “developed” world that will make asset values look more volatile.

Investors urgently need to think about the difference between “risk” and “uncertainty”: the former refers to events that can be predicted with a certain probability; the latter refers to unknown future shocks. Until now, investors in developed markets have tended to focus primarily on risks and assume these can be priced (and hedged against). But 2017 is likely to produce uncertainty. That cannot be easily priced or hedged — and investors should recognise this.

The title of Tett’s piece: “Political risk means all 2017 investment bets are off

I couldn’t agree more.

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