The vast majority of market participants have to do with as all set for a semi-random “volatility occasion” as the dinosaurs were for the meteor strike that doomed them to oblivion.
Judging by blissful bettor– oops I mean “financier”– belief and procedures of volatility, risk of a market drop has been near-zero for the previous 18 months. But threat was never in fact low, it was only hidden. When it emerges, it’s a surprise only to those who incorrectly believed threat had actually disappeared.
As Benoit Mandelbrot described in his book The (Mis)behavior of Markets, crashes are an intrinsic feature of systems like stock markets. These dangers are not generated by specific human actions or belief however by the system itself.
Just as humans make subconscious choices and after that create quasi-rational reasons for their option after the truth, market participants constantly summon some occasion or decision as the cause of the crash. Favorites include central bank policy mistake, black swan events (“bolts from the blue”), incomes surprises, technical levels were breached, and so on.
Mandelbrot’s insights expose why markets crash with no policy mistake or other produced- after-the-fact reason: as those who witnessed the collapse of Japan’s enormous credit-asset bubble in 1989-1990 observed, markets just stopped going up and started falling.
Threat is a reflection of many characteristics, but the key vibrant couple of individuals seem to understand is the intrinsic instability of complex systems: surface area serenity is not a precise reflection of the real state of stability or danger, no mater for how long the period of harmony stretches.
The human mind rebels at the dominance of quasi-random crashes, as our hubris and require to be in charge produces an impression of control: instead of accept that markets can crash more or less “out of the blue” without any black swan or other trigger, we put our faith– yes, faith– in reserve bank policies, readings of sentiment, technical indicators and so forth.
This impression of control blindsides us to the reality that no policy tweak can stave off the quasi-random meteor strikes that are intrinsic features of complex systems. Indulging our hubris-soaked impression of control, we believe that if there were no pilicy errors or black swans, markets could move efficiently higher permanently. That is a basic misconception of the systemic structures of markets.
The vast majority of market individuals are about as all set for a semi-random “volatility occasion” as the dinosaurs were for the meteor strike that doomed them to oblivion. Financial oblivion waits for those ensnared in the quasi-religious faith of Federal Reserve power and other hubris-soaked illusions of control.
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