Argentina: Self-fulfilling prophecy
IN PLATO’S Allegory of the Cave, a group of prisoners are chained to a wall. Their only contacts with the outside world are the flickering, ever-changing shadows that are reflected on the opposing side. As a result, they invent narratives to explain what is really going on.
Eventually, one of the prisoners escapes, only to see that their explanations of what was happening were completely wrong. Upon his return to the cave, the other prisoners become infuriated when he tells them the truth of what was happening outside, and they threaten to kill him.
The Allegory of the Cave is one of the pillars of Western philosophical thought. The quest for truth and reality was not started by Plato, and the process has progressed through subsequent philosophers, such as Aristotle, Descartes, Berkeley, Locke and Sartre.
Our basic question is, what is real, and what is fiction? This is a fundamental metaphysical problem that lies at the core of humanity. We are always searching for explanations, but we can never be certain if they are right or wrong.
Moreover, when they are wrong, it causes dissonance and anger. This is what is currently happening in Argentina.
Up last Sunday night, August 11, there was a fair consensus about the conditions of the Argentine economy. The recovery was slow, but the inflation rate was declining. Furthermore, the debt level was sustainable.
It was also well known that Macri was going to lose to the opposition in the PASO, but that the actual election in October would most likely move into a second round where it was believed he would easily win.
Moreover, the IMF was standing behind the government with a war chest of resources ready to provide support.
Like the prisoners in the cave, the market had invented a narrative to explain what was happening.
However, the PASO drastically changed the flickering shadows. The results were completely different to what was expected, and the possibility of a Macri victory was dashed. Asset prices collapsed, much of it exaggerated by technical factors.
The complete illiquidity of the market became apparent when a whole range of asset prices plunged more than 40 per cent in a single trade.
This flies completely in the face of efficient market theory. This was not an erosion of opinion. It was a reflection that the new trading platforms and vehicles, such as ETFs, that now dominate the emerging market have created a dangerous