Black Swans Within The Economic World

"It won’t happen within the financial markets…” One better be careful with this statement. One of the results of the giant-dimensions-economic experiment of recent years is a chain of events that takes place without notice and with great power and great speed.

We saw the dropping of oil prices effect the market which in turn had an emphasized impact on the currency market. We saw the changes on the Swiss franc, and the euro; we saw the panic by some people, and the thrill by others. But as we well know, it is not a matter of good or bad, it's a matter of how to make profits from those changes.

To prevent a too high strength of the country currency, the SNB removed the cap on its currency. The Swiss franc spiked by over 30% against the euro. The removal of the cap surprised and agitated the foreign-exchange markets since it caused several currency brokers to falter. Even so, many commentators embraced the cap’s removal claiming that the policy was either unsustainable, protectionist or risky, exposing the SNB to appalling losses.

The euro on the other hand ranged in a limited range against the US dollar during the first half of 2014: 1.36 to 1.38 per euro, which was pretty high since within a few months the pair dropped to 1.07, a devaluation of over 25%. It did not even leave a slight chance for a technical correction. Simply put, it was a free fall.

The weakening of the euro has an explanation. And it is doing well for the European economy as opposed to the global economy since the benefit of the depreciating euro to Europe is much greater than the damage it causes to the US economy.

The benefit to Europe’s economy will trickle into the global economy. But when the devaluation occurs with such force, and in such a short time too, you can be sure to expect some problematic side effects.

Many analysts expected the EUR/USD to reach 1:1 ratio during the next 2 years, but no one ever thought it would happen so fast. Today, as a process that used to need time to mature and is now occurring much faster, we can actually expect that ratio will be reached in the coming months. This unexpected ominous volatility is basically telling us to keep an open eye for some surprising events to happen soon.

It is hard to know in which market the next sharply powerful fluctuations will hit. Presumably, it will be with bonds, but the uncertainty is still standing, so it can actually be in any market.

This situation is telling something important to investors and it is that there are times when the right thing to do is to stop pursuing returns, and put more emphasis on risk management and less on yield management even if it is very difficult to kick the yields addiction that spoiled us during recent years.

If so, one can only conclude that in a world where the climate is "crazy", a world in which technological innovation is changing the human habits of generations, a world where high unemployment and economic crisis increases the weight of radical parties in Europe and the rest of the world saying, "it will not happen within the financial markets”, is one conception that NO ONE should adopt.