Tipping point reached as black swans feast on green shoots
18 May 2009
Sean Russo
I ALWAYS find it fascinating how quickly new words or expressions enter into the popular lexicon, particularly when used by financial experts in the media, and politicians.
Remember “tipping point” was John Howard’s favourite for a while there in the dark days of Iraq. It seemed to gain public prominence after the release of Malcolm Gladwell’s book of the same name. All of a sudden there were tipping points everywhere. Interestingly if you read the book (John?) they normally arise despite or in spite of well intentioned politicians, their mandarins and generals.
Nassim Taleb’s poor old “Black Swans” have been sacrificed at so many alters I have lost count. Quite contrary to the core premise of Taleb’s book, much of what has been described as black swans are anything but. But how convenient for a CEO and his complicit board to say they would have hit budget (and not gone bankrupt) but for their particular black swan. Copper falling back to the price it was three years ago is not a black swan event – amusingly the price it fell from probably was! That doesn’t stop people from saying the price fall was a black swan event. Don’t let the facts get in the way of an explanation to shareholders as to why it wasn’t our fault and we are keeping last year’s bonuses.
Now we have “green shoots” (a nice bottle of red to the first reader who can tell me who first coined the term in 2009 and another for anyone who knows if it was used similarly in our economic history). Wonderful imagery, you must agree: the verdant desert just after the rain; the Aussie bush after the ravages of bushfire, black stumps with new green growth that seems to appear almost overnight. I would love to chart the increase in the daily use of the term in the media over the last few months – I suspect it looks like FMG’s share price chart circa 2007-8.
Ah green shoots, thank heavens. Just when we were getting a headache trying to think through the myriad possibilities for managing our personal finances and our corporate responsibilities, a simple image that says everything is going to be okay. The worst is behind us, the future is assured. But it’s a promise of low probabilities: green shoots in reality are incredibly fragile. How many acorns fall from one oak tree in its life time? There’s a reason for that.
Who knows what happens next? I have prepared for seven of the last three recessions; I know I have no idea. What I do know is bad news about the future doesn’t sell newspapers. Not in this arena anyway.
Those who need us to stay engaged know we need reasons to hold onto yesterday’s oversimplifications like “buy and hold” and “stronger for longer”.
Both in our work with clients at Noah’s Rule and in our previous lives working in trading rooms of banks, my partners and I have often observed (and fallen victim to) the desire to over simplify market behaviour, to follow the forecast or scenario d’jour. The reason for this is because markets are incredibly complicated at the best of times and constantly changing. We mortals don’t have the capacity to figure it all out and despite what you read in the Sunday papers there are no fool proof computer systems that can either.
Over simplification is generally follows acute Analysis Paralysis, one of the Seven Deadly Sins of Risk Management Avoidance. Many well intentioned companies set out to measure their risk and manage it appropriately but never quite get there? They keep putting it off, seeking another opinion or consensus forecast, waiting for one more set of economic data or the latest mine plan. In truth they get lost in the impossible task of trying to understand every possible permutation and combination of all the external market factors that impact their business.
They get a severe headache and become paralysed, resorting to oversimplification. “We don’t hedge because XYZ lost money doing it” plays better to the punters than “we are so confused we don’t know what to do”.
Silly thing is they are looking in the wrong place for answers. The answers to risk management and corporate survival lie inside our businesses (and inside our homes when we are playing investor and self managed superannuant). All we can do is to look at our own medium to long term goals and short term strengths and frailties. We need to ensure the latter are managed and/or exploited in the most prudent manner so that the former are most likely to be achieved.
Green shoots and other similar over simplifications are a distraction, a crutch that allows deferral of tough decisions on the vague and undefined promise the cycle of life has gone full circle. Don’t fall for the siren song. Uncertainty is the only certainty. Look inward not outwards, look only at what the markets could do to you and defend against it as best you can. Plan for the worst and be happy to be wrong.
After all it’s better to try and ensure that your own green shots become an oak tree rather than a tulip.