As aficionados of “The Hitchhiker’s Guide to the Galaxy” will recall, “DON’T PANIC!” was the exhortation printed on every copy of the legendary “Guide”; and, yet again, the phrase came to mind as we observed the seemingly overwhelming fear caused in some quarters by “Black Monday 2015”. However, what is a 3-Standard Deviation event, when set against the real Black Monday’s 20-Standard Deviation Event, which we survived, as life went on? And, of course, there had to be “obvious” explanations, with the exact “causation” seemingly dependent upon an individual’s political leanings, or market position.
At Awbury, we try to take the long view; and maintain a dispassionate perspective on what often amounts to “noise”, which masks or obscures the real issues.
So, consider this:
- It was late August. Many market participants were away; volumes are down; liquidity is less
- Most commodity markets continue to trend lower
- There is uncertainty about whether, and when, the Fed will finally raise its policy interest rates
- Geopolitical tensions are rising in a number of areas
- Some relatively large economies are is recession- Brazil, Russia
- What the real state of the Chinese economy is remains opaque, but the CCP is clearly rattled and nervous; and the Chinese domestic share indices were an “accident waiting to happen”
Yes, none of the above factors is exactly helpful; and, cumulatively, they can clearly influence perception and behaviour; but a momentary market seizure is hardly reason to panic when set against a broader perspective.
If one is in the (re)insurance business, do such events really make a difference to the viability of your business model; or to the probability that clients will buy particular coverages? Unlikely, except at the margin. Your share price was whipsawed? So what? It happened to most! Perhaps there was some unexpected volatility exhibited in certain components of your investment portfolio? Well, think about how you may be able to dampen or remove that by moving exposures to the liability side of your balance sheet- Awbury has products that can help you do so.
We believe that such “volatility events” are useful, because they force one to re-examine assumptions and avoid complacency; and to question whether one might have missed something in a risk analysis. No self-respecting risk manager should ignore what happened on August 24th; and, quite clearly, there are macro-economic factors that should engender caution. However, trying to parse what happened and seek its “meaning” in isolation is pointless. Such events are almost invariably symptoms, not causes- and it is the causes that matter. Events in China were at least a catalyst; but we would be much more concerned about the impact of economic slowdown, political in-fighting, policy paralysis and credit de-leveraging in the PRC, than about the gyration of its stock exchange indices.
So, in short: “Keep Calm and Carry On”. The world has not come to an end just yet…