Much has been written in recent years about the short term investment risk created “Black Swan” events. Black Swan events are negative, come from nowhere and are seemingly unpredictable. Their sudden emergence has an immediate effect on asset prices as traders jump into markets and normally short risk assets (for instance equities) and buy low risk assets (bonds). Concurrently they may take tactical trading positions in oil or gold depending upon the event. Currencies may also come into play, with often the USD being targeted as a safe haven.
Turkey – A “Black Duck” event
So why did the coup in Turkey not become a “Black Swan” event? The answer lies in the timing of the coup and the time it took to put it down. The timing of the coup occurred as the US equity market was closing on Saturday morning (Sydney time). There was no blip in the US equity market because the extent of the coup was not clear or possibly even reported. There was a brief extended period when currencies traded. The $A fell sharply on Saturday morning and closed at about US75.5 cents (down from US76.5 cents) as Australians awoke to the news in Turkey. The traders had one asset to play with – currencies – and they used it.
Markets were closed for the weekend as the coup attempt faltered. By Sunday (Sydney time) the coup had collapsed and there was no dispute as to who was governing Turkey. This meant that when markets reopened in Asia on Monday (with Europe and USA still asleep) there was no need to panic and no potential for traders or hedge funds to destabilise markets. That is our definition of a “black duck” event – one that occurs when world markets are closed.
The above supports the our view that many events that drive market prices are over-hyped, overstated and rarely properly analysed until well after the event. They are overstated and over hyped by commentary coming from hedge fund managers who are literally talking their own book. Compounding the volatility are the flow of dumb statements that flow from bankers, bureaucrats and politicians. They are also talking their own book by feigning that they know what is occurring and how to deal with it.
We can imagine what markets across the world would have done if the coup commenced on a Monday night Sydney time. European equity markets would have been in free fall and central banks would have again promised unlimited liquidity. The USD would have spiked higher and a further long term bond rally occurred. We have even seen German twenty year bonds trade at negative yield, oil and gold pop. By Wednesday the chaos would have ended and markets stabilised back at the approximate level of the previous Friday night prior to the coup. It would have been a black swan event that was short lived, created havoc but was tradeable. Last weekend we had a black duck event that did not disturb our weekend or our portfolios!