In case you missed it, the FT’s Gillian Tett had a great piece yesterday on the emergence (or perhaps the re-emergence) of risks that are hard to quantify but have a very powerful effect on the markets:
As turmoil builds, investors and policy makers are being tipped into cognitive shock. In the past few decades, most investors have operated as if the world was a place in which the key variables could be plugged into a spreadsheet or computer model. Ever since the computing revolution took hold on Wall Street and the City of London in the 1970s, finance has been treated not as an art but a science – and banks have operated as if computer models could not just explain the past but predict the future, too.
These non-quantitative factors are making it difficult to respond to events in Europe as the debt crisis deepens. Beyond Europe, there have been events like Argentina’s re-nationalization of oil company YPF that would have been hard to imagine at the start of the year, much less plug into a market model. Even the credit risk of the U.S. increased (although you wouldn’t know it from Treasury bond yields) because of political uncertainty.
If there is any good news, it is that people are becoming more accustomed to these swings. We’ve seen several back-from-the-brink economic rescues, big bank failures, eleventh-hour policymaking. Nonetheless, the effect has been to make consumers and businesses more cautious about spending, even if their instinct to panic is held in check.
For companies, this new age of volatility means they will need to communicate more not less, and do so more quickly, before they are overrun by a rumor. They’ll also need to recognize that even the best communication cannot immediately change the minds of investors who are fleeing from risk.