The Euro Crisis: Austin Powers on a Steamroller

If you’ve read Nassim Taleb (or this blog, since we mention him fairly often), then you’re probably familiar with the concept of the “black swan.” It’s a way of thinking about the “unlikely” events that no one thinks will happen – but they do, and far more often than we’d like. It’s the Black Monday crash of 1987 or the May 2010 Flash Crash – and if you aren’t prepared for the Black Swan, you’re probably going to get into trouble eventually (think Long-Term Capital Management…).

Which leads us to 2012 and the so-called Euro Crisis. Is the Euro Crisis a black swan? Or is it more like the Austin Powers Steamroller?

We’ve heard from some corners people calling last month’s selloff and the potential Greek exit from the Euro (or dissolution of the Euro) as a black swan-type event. But can anyone really say these events are unexpected anymore? This doesn’t really resemble Taleb’s black swan… this is more of a slow, fat white swan that everyone has seen coming for years. It’s been a slow motion car wreck, analyzed and discussed ad nauseum for years. We’ve been unsure about how close it is, how big it will be, and so forth – but there has been no doubting it is there and it is a problem.

Just how long have we been wringing our hands over this mess? The New York Times European Debt Crisis Timeline starts off in September of 2009, with the first reports that bond markets were starting to worry about debt levels among Eurozone countries. The first Geek bailout was announced over 2 years ago. Ireland followed in November of 2010. The ECB started buying Italian and Spanish bonds to attempt to bring down their yields back in August… Can anyone really be surprised by what comes out of Europe anymore?

We can’t think of any analogy more fitting than that steamroller scene from Austin Powers. This crisis has been slowly creeping closer, a steamroller inexorably rolling our way, threatening to crush us underneath. There’s been screaming, crying, begging, and pleading; as well as stopgap measures and temporary palliatives; but there’s never been much doubt that it’s still bearing down on us.

Sometimes losses are caused by unexpected events (or at least, not-widely-expected-events), but this time around the causes are right there for all to see. In the end it will come down to timing, and the odd logic that government intervention may inflate asset prices, causing conditions to get better before they get worse. In other words, we’re experiencing a game of chicken – with traders having to weigh the danger of the crisis finally coming home to roost with the benefits they can capture from short-term solutions that governments implement (QE3, etc).

We can’t say for certain what the future holds, but we do know that we’d much rather face it armed with a plan, solid risk management practices, and a portion of our portfolio that can prosper even when the steamroller hits. Are you prepared?





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