Ride a Black Swan

One of the many great things about Enron, long before it went under, was that it brought really strong financial practices into the energy industry and made people take financial risk management (FRM) seriously.  We can talk about the rich, deep ironies another time.  I was never a risk manager myself, but was strictly schooled in its principles, technical and pragmatic, the better to negotiate sound contracts (which is my trade).

One of the interesting aspects of FRM is that no commercial institution, even a bank, is held to providing 99.9% certainty in its hedging etc - not even 99% in fact; because it can't be done using shareholders' equity without crippling economic cost.  Everyone knows that 100% physical safety is impossible - the cost of moving from, e.g. Five Nines to Six Nines is prohibitive - and likewise that extreme financial events happen out in the "fat tails" of the distribution, that can't really be catered for within the economics of an enterprise in the same technically-sound ways that can be implemented out to two standard deviations.  But what if folk are deeply risk averse, as they surely have the right to be?  The textbook solution to this puzzle is that they must take (partial) responsibility for their own FRM, by diversifying their exposures.  Not everything will go pear-shaped simultaneously ...

Except of course when a Black Swan glides onto the waters.  At this point, hitherto non-correlated risks all become correlated, in the shit-direction: so Diversification fails (as well as hedges not performing and insurance not paying out).  And then we are down to the last resorts:  burning through capital reserves (which were anyway set at the 95% risk level, so by definition they don't go far enough), and then ... socialisation.

Now as CU said the other day, 2020 looks like making 2008 seem like a picnic.  (E.g., I had a massive hedge on against 2008, and it paid up.)   This time, it's straight through to socialisation, and pray God that good decisions are made.

A lot of Socialists are drawing understandable (sort-of) but very wrong conclusions.  Wonderful, they say - and let's keep it fully socialised thereafter because Capitalism Doesn't Work.  This is the merest crap.  I won't rehearse what a feeble-minded misunderstanding that represents as regards What Capitalism Is; suffice to say that they were saying the same thing at the outbreak of WW1, and WW2 (and in fact every day of every week).  It was equally ridiculous then as it is now.  We socialise against the Black Swans, the Kaiser, the Nazis, the C-virus.  And in normal times, we optimise our affairs intelligently.  Leftist snipers can f*** off, and do something useful in the community. If they know how.

One more weekend thought for now.  The EU can f*** off, too.  Their threats will have no force whatsoever, when negotiations recommence.  What, they gonna threaten us with a 1% hit on GDP?  Shortages in the supermarkets and bread riots?  By then, we'll have solutions for all that stuff - and quite possibly better ones than theirs.  Small comfort right now, but I'd confidently say we'll get a sensible deal quite easily - with whatever's left by then.

Keep safe, all.

ND

Putin ill - a would-be Black Swan event?

Chances are it will come to nothing, but it has intrigued me think this morning that if reports of Putin being very unwell were true and he were to suddenly and unexpectedly come over all Hamlet, it would rather throw the play open...

- Who would take over - Putin has been careful to not groom a successor. There does not seem to be a familial line up in waiting.

- Would they continue to back the Ukraine war - from what I can tell, this is not quite so overwhelmingly supported at home as is portrayed.

- Might Obama back away from a deal with Iran. Without Russia, Assad in Syria has a limited shelf-life. With the imminent arrival of several Iranian brigades his future currently is looking more assured.

- Greece's weak hand would be even weaker in their 'negotiations' with Germany the EU.

As always, the world could become a more stable place or less stable one very quickly.