Ducks Water and Markets

We are told by the experts that financial markets don’t like uncertainties. This is about as useful and accurate as saying ducks don’t like water

Week follows week of international turmoil in financial markets. News unfolds rapidly. At the time of writing [10th May 2010] the EC announces a ginormous financial scheme hoping to avoid a domino effect induced by the collapse of the Greek economy. In the UK, we await the opening of the trading markets today, fearful of the impact of the yet-to-be-resolved outcome of last Thursday’s General Election.

This is a time which brings out the worse in commentators. The specific circumstances are avoided, as the experts are invited to explain what is happening. Waking up to such converations this morning, I heard the famous refrain: “Financial Markets don’t like uncertainties” Someone got up very early to share this with me.

Trouble is, the statement is a cop-out. You can translate it as: “Don’t ask me to say something useful about what’s going on. There’s too much of this uncertainty stuff around.” Maybe a few years ago it would have been a surprising thing for a pundit to explain that “markets don’t like uncertainties” to non-financial audiences. Now I expect my taxi-driver to explain what’s going on in such terms.

To trade or not to trade

And it’s not even as plonkingly right a concept as it appears. The one thing which would terrify financial traders would be absence of any uncertainty, that is to say the arrival of perfect information conditions on Earth. Trading relies on uncertainties to permit the exercise of judgement. ‘To trade or not to trade, that is the question’ and then secondary considerations: ‘to sell or not to sell’ and so on.

There is, however, an explanation of why financial folk talk about markets not liking uncertainties. What traders really like is ‘business as usual’ uncertainties within which trading permits big wins coupled with assorted ways of protecting the traders from being directly damaged by losses.

Technically, we should all get a bit more acquainted with the differences between risk management and uncertainties. The former operates with (relatively) trustworthy information. The nasty sort of uncertainties are those which are unanticipated in advance. Now if the financial experts would say a bit more about these concepts, their comments might be more valuable.

Image acknowledgement

Image from Wildfowl and Wetlands Trust

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