Colossal Hubris

Perhaps the most rampant folly I have heard throughout the start of 2012 is that somehow we are now immune from selloffs relating to Europe, because we are now somehow total experts on ALL possible outcomes from the EU.

Never mind that this weekend, most pundits were taken completely off guard as extremist movements sprung up like dandelions in opposition to austerity and, yes, the euro.

Never mind the surprise when Norway of all places almost had their government collapse, without warning.

But what I find so ironic about this line of thought is that it is exactly identical to what I heard last year around mid-June, when the same people were arguing that we could not experience a selloff because the market was now candidly aware of all risks from the previous selloff of 2010 – which was in response to Greek debt woes.

And oh how we didn’t get one…

What disturbs me is twofold; firstly, that decadent traders are presupposing that the collective efforts of markets are even capable of comprehending the ever evolving developments from these sensitive issues (judging from the now cliché shock every time something new and unexpected happens, I’m going to guess not), and second, that the discounting always seems to give the most improbable outcome benefit of the doubt (financiers who are universally hated will manage to simultaneously devalue their currencies, restructure their debt without aid from private investment, and avoid price shocks, while not sparking revolutions from the people they are toying with) when any error in the least – error such as we’ve been seeing mispriced – should result in calamity.

When we look past what “the market” – which at this stage in the game seems to be mostly traders staring at their own transactions in a mirror – thinks it knows, and instead focus on all the things that we’ve gotten wrong…well, my own confidence in our ability to appropriately price in “risk” is more or less nonexistent.

However, while you may disagree with me, the distinction is that if everything works out perfectly, markets are at best adequately priced where they are. Whereas, should you discover that I am correct and there is nothing more omniscient about a half million junkies placing bets on opaque outcomes than any one of these men and women on their own, the result will be a proverbial bloodbath since there seems to be no amount of caution left.