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Page added on April 18, 2014
What Oil War Premium?
Central bank’s ongoing and so-far-successful efforts to crush short-term volatility and encourage hapless individuals into the world’s nominally rising stock markets has had consequences. Inequalities abound (rich vs poor, corporate profits vs capex/jobs, bond yields vs growth hopes) but nowhere else is this more evident – given the ever-increasing crescendo of the drum-beat of war around the world – than in oil price volatility. As the chart below shows… oil price volatility is at its lowest in 21 years. We can’t help but be reminded of Taleb’s priceless phrase that “there is no freedom without noise – and no stability without volatility.”
This constant suppression of short-term volatility can lead to only one thing…
How Suppressing Volatility Makes the World Less Predictable and More Dangerous
Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These arti?cially constrained systems become prone to “Black Swans” — that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.
Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.
Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open — fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying.
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As Jean-Jacques Rousseau put it, “A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom.” With freedom comes some unpredictable fluctuation. This is one of life’s packages: there is no freedom without noise — and no stability without volatility.
4 Comments on "What Oil War Premium?"
markisha on Sat, 19th Apr 2014 6:30 am
excellent
Davy, Hermann, MO on Sat, 19th Apr 2014 8:09 am
ARTICLE SAID – Taleb’s priceless phrase that “there is no freedom without noise – and no stability without volatility.”
ARTICLE SAID – Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface.
As Korowicz says “individuals, and as a social species we put up huge psychological defenses to protect the status quo” What needs to be clarified in this article is the suppression of volatility for the 1%er’s. The poor and lower class are experiencing significant volatility in their difficult lives. It is the rich that are practicing financial repression to continue the wealth transfer to produce a pseudo growth for the very wealthy. It is all part of a debt bubble Ponzi scheme that is robbing the future generation and the current 99% of the world population for the enrichment and enhancement of a few. This can go on for a while. Systems can be repressed but they will always cycle. A repressed cycle leads to more violent shifts when equilibrium is broken. In a classic case of catastrophic bifurcation what will shake out is difficult to know because when you stress a system far past its breaking point a great deal of chaos is unleashed. The results of chaos by definition are not readily definable because they are nonlinear and variable. All I can say is when this thing blows it will be a doozie!
Pops on Sat, 19th Apr 2014 12:15 pm
How is the market artificially constrained?
The market is stable because production and demand are pressed up tight with no apparent spare capacity on the supply side and an economy going nowhere on the demand side.
Not that there won’t be a break out in one direction or the other, just that there is nothing artificial about it.
Boat on Sat, 19th Apr 2014 1:50 pm
Since the age of the internet there has been much more noise to see. All you have to do is google for it.
I would call that chart very volatile.