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Areas of Doubt and Uncertainty

30 May 2017
Richard Kemmish

In the Hitch-Hiker’s Guide to the Galaxy, two representatives of the national union of philosophers are concerned about the encroachment of computers onto their business of deciding the meaning of life. One of them sets out his demands for ‘rigorously defined and enforced areas of doubt and uncertainty’.

That philosopher would have been very happy with the state of the financial markets today. Areas of doubt and uncertainty are growing and the rational, objective analysis of the world seems to be in retreat. The Oxford English Dictionary’s word of the year last year was ‘post-truth’ which it defined as ‘relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief’.

Anyone who has spent the last year living in Britain will know exactly what ‘post-truth’ feels like. The quality of the Brexit discussion – on both sides – leaves most people in a state of despair. On one of the most important topics of our generation there is a vacuum of information, where there should be reasoned discussion about possible outcomes there are vitriolic diatribes.

The word ‘post-truth’ can be a prefix to either politics or economics. In the latter what was once taught as objective fact – such as the Phillips curve or the Kuznets curve – is now hotly disputed. Emotions have replaced reason, particularly when it comes to the Kuznets curve – the predicted path of income inequality in society. The breakdown of the Phillips curve might explain the current extreme monetary policy, the breakdown of the Kuznets curve might help to explain populist politics.
Perhaps both partly explain the great paradox of the year: monumental changes in society and threats to the existing world-order at the same time as ultra-low volatility in the financial markets.

This time last year, at the Global Borrowers and Investors Forum 2016, Britain voting to leave the European Union and the election of Donald Trump were both considered by panellists to be low probability events which, in the unlikely event of them occurring, would have major repercussions for the markets. We were wrong on both counts, both happened, neither had anywhere near the market implications that were predicted. Other, potentially significant political and economic events have similarly underwhelmed markets.

Why? More importantly, is this a temporary phenomenon?

As someone who has always worked in the bond markets I would posit that extreme liquidity in the banking system is the main cause of this disconnect. Technicals trump fundamentals, at least in the short term.

Abnormal, extremely abnormal, monetary policy may have created a semblance of calm in the markets which has allowed them to ignore those vast areas of doubt and uncertainty. But the next phase, the normalisation of monetary policy, has started in the US and is imminent in Europe. The challenge is understanding the implications.

To return to the Hitch-Hiker’s Guide, when Trillian turned off the improbability drive she announced: “We have returned to normality. Anything you still can’t cope with is therefore your own problem”.

I’m looking forward to discussions aimed at reducing the areas of doubt and uncertainty at this year’s Global Borrowers and Bond  Investors Forum in London in a few weeks' time.

For more information about the Forum, please visit the event webpage.

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