Mini- catastrophes may be just what you want to exploit volatility
Welcome to the era of black ducks.
During the last decade, Nassim Nicholas Taleb, a professor at the New York University Polytechnic School of Engineering, became something of a celebrity for his exposition of the concept of black swan events — those unpredicted, high- impact events that shake markets, economies and societies.
The First World War and 9/ 11 are two examples from world history. In finance and markets, the best known and most recent is the 2007- 08 financial crisis, which was touched off by the collapse of the subprime mortgage market in the United States.
The thing about black swans, according to Taleb, is almost nobody sees them coming, but pretty much everybody manages to find a good explanation for them afterward.
Since the Great Recession, though, real black swans have proven to be pretty rare birds. And yet investors still seem to see black swans where they probably aren’t.
In these volatile days, we seem to be seeing more fear trades in reaction to mini- events. This week, we’ve seen two good examples.
Monday, Martin Shkreli, the chief executive of Turing Pharmaceuticals, took to the business TV circuit to defend his decision to raise by 5,000 per cent the price of a drug commonly used in AIDS treatment.
Presidential hopeful Hillary Clinton cried foul and pledged that as president she’ll do something about price gouging. The Nasdaq biotech index fell about seven per cent.
Does this make sense? Not if you get out of the shadow of the black duck’s wings. As analysts at Jefferies Biotechnology point out, debate over drug pricing has been going on for a long time, and not much will likely arise out of Clinton’s pledge.
Another black duck was news Volkswagen AG cheated on emissions control tests. Volkswagen’s stock has taken a beating, down more than 30 per cent as the company faces billions in liabilities.
Whatever you think about the prospects for biotech or automotive, neither event adds up to a black swan event, and don’t change the fundamentals in those sectors.
If you’re looking to exploit volatility, these mini- catastrophes may be just what you’ve been waiting for.