Hyper-normalizing the Black Swans
"On a social-media network, it’s very much like being in a heroin bubble. As a radical artist in the 1970s, you used to go and take heroin and wander through the chaos and the collapsing Lower East Side, and you felt safe. That’s very like now. You know you aren’t safe, but you feel safe because everyone is like you."
Yesterday the Federal Reserve released fresh print projections. To nobody's surprise, the central bank delivered its second rate cut, lowering interest rates by 25 bps to a new target range of 1.75-2.00%.
The policymakers acknowledge that economic outlooks have grown darker since the last FOMC meeting in June. On Wednesday Powell remarked, "I think that the idea that if you see trouble approaching on the horizon you steer away from it if you can, I think that's a good idea in principle."
We don't know what exactly are the looming troubles the Fed sees on the horizon. But we did see a whirlwind of extraordinary events in the past few months: the U.S. designated China a currency manipulator; the yield curve inverted for the first time in over 10 years; populism erupting on every corner of the globe; the trade war intensifies; and geopolitical tensions in Middle East flare up while the impact of the attack on Saudi Arabia's oil plant starts to ripple through the rest of macroeconomy.
What's interesting is that a year ago, any of these events would've been considered a "black swan", an event on the long tail of probability distributions that usually bring forth massive consequences.
As global economic activities become increasingly interconnected, and as information spreads wider and faster than ever, the pace of change in human life increases, causing collisions between events.
What happens to a highly inflated economy where black swans become hyper-normalized? Does the market overall become less risk-averse? Will the collective market psychology gradually accept the long tail as the mean?
"Huge portions of the yield curve remain inverted, just not as deep as a few weeks ago. At the long end, the 30-year bond yield rose from 1.938% on August 28 to 2.375 on September 15. Today, the long bond yield is now back to 2.22%."
"'A lot of October arrival barrels were already on the water so the hole is going to show up toward late October,' one senior European oil trader said. 'There has been a mad scramble on the paper markets but the physical scramble will come later.' Precisely when any rush for physical crude kicks in will depend on the level of Saudi Arabia’s inventories and how long it needs to rely on them to ensure clients receive full allocations."
"Payments platform Stripe Inc. became one of the most highly valued startups in the world on Thursday, after it announced a new funding round at a $35 billion valuation. In the U.S., only vaping giant Juul Labs Inc. and the troubled We Co. are more valuable. Stripe raised $250 million in funding in the new round, which the company said will be used to continue to expand around the world and launch new products."
"The super apps WeChat and Alipay became an integral part of the Chinese mobile ecosystem, growing to more than 1 billion monthly active users (MAU) and 1 billion annual active users (AAU), respectively. They both offer services from food delivery and bike sharing to a full suite of financial services such as payment, insurance and investments. Now, companies from around the world are trying to replicate the successful Chinese model in their region. And Latin America is an especially compelling region for the emergence of super apps, due to its vast population, almost 650 million, distributed in more or less similar countries regarding language, culture and religion. It also has a mobile-first population with 62% of smartphone penetration, according to GSMA data."
"But this rush to become a smart city has a major drawback: The more connected a city is, the more vulnerable it is to cyberattacks. Hackers have, in recent years, effectively held cities hostage through ransomware, sometimes crippling critical systems for months at a time. The damage can cost millions to repair, as Baltimore and Atlanta have discovered."
"So yeah, I don’t know, but if I were a betting man, I’m betting on this industry [asset management] being around in something resembling its current form for much longer than most people would extrapolate from current trends. That means people and institutions continuing to pay above-passive fee rates for active management at the portfolio and asset class level. If you’re a full-hearted FA trying to do good, I think you’ll have your shot as long as you want it. If you’re a full-hearted active investor who thinks there are still reasons to own things based on an assessment of their value, so will you. But all of us would also benefit from eyes clear enough to see that the reasons for the persistence of some parts of our industry as they exist today are not ones to feel particularly good about. "
"How do millions of citizens, holding a wide range of views, often in furious conflict with each other, actually function as a single brain in practice? How does the brain form opinions? How does it learn new things? How does it make concrete decisions, and how does it change its mind? The big U.S. brain thinks using the same system it employs to distribute resources and elect leaders: the Value Games. The First Amendment, in addition to providing a key liberty, opens up a whole new competitive playing field: The Marketplace of Ideas"