Opinion: Volatility spike ahead
Promises are whispered in the age of darkness Want to be enlightened like I want to be told the…
Promises are whispered in the age of darkness Want to be enlightened like I want to be told the end, end, yeah And the barrel shakes aimed a directly at my head Oh, help me, help me from myself And I listen for the voice inside my head Pearl Jam, “State Of Love And Trust”
“Today abstraction is no longer that of the map, the double, the mirror, or the concept. Simulation is no longer that of a territory, a referential being, or a substance. It is the generation by models of a real without origin or reality: a hyperreal. The territory no longer precedes the map, nor does it survive it. It is nevertheless the map that precedes the territory — precession of simulacra — that engenders the territory, and if one must return to the fable, today it is the territory whose shreds slowly rot across the extent of the map. It is the real, and not the map, whose vestiges persist here and there in the deserts that are no longer those of the Empire, but ours. The desert of the real itself.”
– Jean Baudrillard, Simulacra and Simulations
In his thought provoking book Homo Deus, Yual Harari opines that “Having secured unprecedented levels of prosperity, wealth and harmony, and given our past record and our current values, humanity’s next targets are likely to be immortality, happiness and divinity.” That’s an interesting forecast given that humanity seems facing challenges of the real possibility of ecological catastrophe and a crisis of inequality between as well as within societies.
However, what struck me as an even more interesting claim is that the individual is nothing but “algorithms”. Mr. Harari seems to believe that eventually artificial algorithms will be able to know the human better than that individual knows himself/herself and liberal humanism will then give way to what Harari calls “Dataism”. A similar vision is to be found in the TV series Westworld where humans are more predictable than the AI and can be reduced to just a few lines of algos. Even the AIs chose to spend their rest of their lives in a computer simulation rather than the real world. Baudrillard is probably turning in his grave.
Back in the early 2000s amid the Nasdaq/technology bubble, Schumpeter with his “creative destruction” was the prophet of Silicon Valley and Wall Street. I doubt many of those bankers and entrepreneurs using “creative destruction” as their mantra ever read Schumpeter’s book “Capitalism, Socialism and Democracy” where most of his relevant ideas were laid out. In this book, laments more for a lost world and the traditional role played by the entrepreneur than cheerleading some technological utopia.
What Schumpeter describes is the destruction much of the space for small scale businesses to operate which undermines the long-term support for capitalist system itself: “The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function.”
What’s the relevance for markets? My hunch is that somewhat blinded by low volatility, fancy acronyms and belief in the omnipotence of policymakers, investors have been lulled into a false sense of security. And investors justify this is sense of security by looking at market prices and realized volatility (so far low but rising) in self-reinforcing positive feedback loops. So the market prices that are supposed to be reflections of the reality become the reality or both the input and the output until “something” strong enough to disrupt this loop.
With the history books filled with examples like where hubris, leverage and a strong belief in a new paradigm led to disaster you’d think people would maybe, learn from the past. Whether the belief that almost everything even humans can be boiled down to some basic algos constitutes a new paradigm, I do not know. But in February – March this year we has seen just a glimpse of the dark side of algos.
And last week’s fall in Facebook shares may be that “something” but should be seen as a wake up call at the very least. One of my top “disruptor” candidate remains trade war (will try to elaborate in a separate note).
But there are many potential trigger candidates ranging from the coming November deadline for Iran to populism/regulation risks for FAANGs. Any single one of these potential shocks could disrupt and potentially reverse the “benign” feedback loops. A combination of these would constitute a big shock and could be magnified by seasonally lower liquidity.
Or may the slow creep up in realized vols will disrupt the “benign” feedback loops. In any case and as said before, we continue to expect a significant sell off until the summer is over. On a relative basis EM and value style may outperform over DM (fall less) and momentum in a position washout move since the latter have become more crowded trade.
In FX, contrary to the market’s initial reaction the BoJ’s announcement this morning, JPY seems best positioned to our anticipated risk off phase. Last but not least, long Gamma/owning volatility also may make sense.
By guest columnist, Mr Murat Berk,
Chief Strategist, Yapı Kredi Yatirim