What Took You So Long?

Imagine you’re back at school, in history class. You’re eleven years old, and on your screen is a text about Europe. It is the year 2200, by which time what happens now, just like all of us, will be history.

History is the great integrator, so it won’t single out the Boston or Paris attacks, but it may well highlight the period between 1970 and 2050 as the Age of Terrorism. Right from the start of the 1970s, with the hijacking of TWA 741 and Swissair 100 by Black September, all the way to the present day.

The perpetrators of all this trail of death and destruction claim to be true believers in Islam.

There will be mention of the Afghan and Iraq wars, and if the world is by then less dependent on oil, some of these may become known as ‘oil wars.’

With oil currently between forty and fifty dollars a barrel, there is already plenty of pain. In the United Kingdom oil industry, tapping into offshore wells is only profitable if the price is above sixty dollars, so operators are losing money hand over fist, and shutting down capacity.

Oil exporting economies also have their breakeven. Norway will resist forty dollars, everyone else is already hurting. This means more debt, and potential recession.

Breakeven point for different countries, based on national budgets.

Breakeven point for different countries, based on national budgets.

The flip side is a boom in gas-guzzler sales, big cars are back—and in the U.S. that means BIG, which supports my theory that many people don’t give a shit about emissions control, or climate change, and corporate responsibility from the auto industry goes right out the window.

The other big historical theme will be the financial crisis, led by austerity in Southern Europe. In other words finance, and its social consequences, plays a major part in European history in the first quarter of the twenty-first century.

Whether it becomes known as the great social experiment, or as the European tragedy, is yet to be seen. As a Chinese premier once said, ‘too early to tell.’

We do see the repercussions of all this connectivity, as the euro romped well below 1.1685 against the dollar this week.

That magic number, of course, is the value it began life at, back on January 1st 1999. Whether or not ‘Sexy Alex’, as the leader of the Greek Syriza party is known, succeeds on January 25th, the euro will trend downward in 2015.

Grexit, as the Anglo journalists call it, may be inevitable. Or not. It may be supported by Germany. Or not. By the Greeks. Or not. The point is outside of Greece, no one seems to care. Like Ebola, contagion seems a thing of the past, although people are still dying in droves—but it’s a local thing now, so why should we care.

The Economist has a great piece on Tsipras, who apparently refers to austerity as ‘fiscal waterboarding’—no one ever accused the far left of lack of imagination. Funnily enough, half-way down appears the title of today’s text, What Took You So Long?

Great minds think alike, or perhaps fools seldom differ.

But my title was actually inspired by the variance markets impose when highly leveraged, my favorite theme of non-linearity. There is a certain irony in the fact that it was the Swiss, that most boring of nations, who felt this sudden change.

The central bank pegged the swissie to the euro since 2011, and has since been spending a bag of cash (virtual of course) to stay the course. Why the peg? Because all the anxiety in Europe had pumped euros into Swiss francs, and the currency appreciation was playing havoc with the price of cuckoo clocks (and related timepieces).

The Swiss alps. The 2011 crevasse, henceforth to be known as Mount Euro, was deep, but it took time to enter and exit. Compare that with last Thursday, Jan 15th, when the euro fell off the glacier.

The Swiss Alps. The 2011 crevasse, henceforth to be known as Mount Euro, was deep, but it took time to enter and exit. Compare that with last Thursday, Jan 15th, when the euro fell off the glacier.

I got the chart from Yahoo Finance—sorry for burdening you with two graphs today, rather than pictures of Lady Gaga and Brad Pitt, like all the other blogs that aspire to an audience.

Along with the graph I read a piece called Currency Shocks and Cuckoo Clocks. (gosh, we keep stealing each other’s lines today). It’s a guest blog (I haven’t got to that yet, maybe one of these days), and it suggests that the probability of this kind of tumble is a 25 sigma job (I tried the Greek letter for you, but WordPress did a Grexit), higher than the big bang.

This combination of global connectivity, instant automated communication, and computerized action is a triumvirate of iniquity. If you add to that the leverage on some of the financial products, it’s another perfect storm—under the right conditions, one man’s decision equals immediate disaster.

In contrast, because ecology is not computerized, there are buffering systems at work. Their effect is to introduce key lags which allow the system to respond, adapt, and (usually) recover.

If you put too much nitrogen into the ocean (we do), it responds in exactly the same way as when you fertilize your lawn. Plants grow faster. In the ocean, those are microscopic algae, and when they die, they decompose. That uses up oxygen. In the sea, that’s a scarce commodity, like common sense in bankers. Too much fertilizer, too little oxygen. Fish die.

But if you put an oyster reef in the way, the shellfish filter out the algae. No oxygen problem, nice fish, and a dozen oysters on your plate, with a dash of Tabasco. And a glass of tinto, unless you insist on being French about things.

Oysters pump a US gallon (almost four liters) of water per hour, which is pretty impressive. So a reef gets rid of a truckload of algae—this is called an ecosystem service.

But the oysters can only do this because they have time. Plant growth is not a computer program, and the oysters react to this change. Some beasties do things quicker, others slower, but we go through life adjusted to annual cycles in plants and animals.

Much of the economic theory is really applied human biology, stemming from foraging, predator-prey interactions, scarcity and connectivity, and much more.

However, ecology is fundamentally dependent on thermodynamics, and world economics is a human construct, where the links in the food web are artificial.

We can expect all sorts of disclosures about this high energy event in Switzerland, and we can expect more such events in the future. We can expect the unexpected, and we can expect it to rock our world.

What’s next for the swissie, who are the biggest losers? We’ll need to wait, but Alpari, he principal sponsor of UK soccer club West Ham FC, just went bust. Its website advertises: Trading. The way it should be.

Barclays and Deutsche Bank reportedly took a dive, and the list will continue. Oh, watchmakers and skiers aren’t happy either.

Hey guys, you could at least have waited until after Davos!

Atmos Fear and The India Road. Quick links for smartphones.

Atmos Fear and The India Road. Quick links for smartphones.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: