Behold the magnificent Orange Swan - Ben Nevis is not Mount Everest

Dear Reader,

Who got excited about Jackson Hole?  I personally think it just sounds like some rubbish prog rock 70's band who bored the pants off people by jamming for hours with no actual songs. I stayed away from it to be honest.

The most exciting thing that happened this week was the Orange Swan's reaction to China imposing retaliatory tariffs on Merica.  My guess is China thought Trump's delay in doing anything recently was  a sign of weakness and they decided to push back and see what happened.

Well we now know he isn't weak. Blimey I didnt expect Friday's announcements.  If he was a Dungeon and Dragon character he really would be Chaotic Good (I am showing my geek side here and don't get me started about World of Warcraft).  

The net result of this was the markets selling off dramatically and gold continuing its safe haven status. Before everyone goes screaming off the edge of the cliff about going fully invested in cash like a herd of flaming lemmings I would point out that indices year to date are all still green. 

 If you still think we have potential for big down legs then perhaps you should start to look at getting some downside protection in your portfolio by adding some absolute return funds like Artemis. It has long and short positions which means you will benefit from down or up moves equally.

The worst part of my week was waking up this morning to discover my main pricing source Morningstar has decided to change its webpage layouts meaning I at some point will have to manually recode every line of every page of every client's online portfolios. Great work fellas.

Anyway I wanted to talk today about Benoit Mandelbrot and Noah Effects.  One of the key problems in today's markets is people simplifying  risk.  I think modern bankers have forgotten much of history as QE and central bank involvement in markets has stopped the market performing naturally in cycles.  It is important to  know that even in this case unforeseen events will happen (like Trump's tweets) and the prepared amongst us will stand out from the herd.

If you get a chance I suggest you read The Misbehavior of Markets: A Fractal View of Risk, Ruin, and Reward . Benoit Mandelbrot was possibly a bit of a one trick pony because he kept banging on about Fractals all the time applying it to all walks of life  (How Long Is the Coast of Britain? Statistical Self-Similarity and Fractional Dimension   must be a real page turner ) 

but he is certainly worth reading.

His key point in this is that in his own words the seemingly improbable happens all the time in financial markets. He cited the year 1997 when the Dow had fallen 7.7 percent in one day. (Probability: one in 50 billion.) In July 2002, the index recorded three steep falls within seven trading days. (Probability: one in four trillion.) And on October 19, 1987, the worst day of trading in at least a century, the index fell 29.2 percent. The probability of that happening, based on the standard reckoning of financial theorists, was less than one in 10^50 – odds so small they have no meaning.”

This should put the recent market falls in stark perspective - A financial Ben Nevis to 1987's  Mount Everest if you will.  

The Noah effect is described as abrupt, disconnected interruptions in a continuous series of factors. Nassim Taleb for me coined it better as a 'Black Swan'  Donald Trump is both of these things.  I am now  getting a mental image  of him dressed  as Noah riding a big Orange Swan on his way to the G7 in Biarritz.   Look out for some fireworks!

On that happy note and realising that financial theory is very much like like music in a supermarket (Swiss Toni again I hear you groan) I think we can end it there.  

Have a superb bank holiday weekend (UK) we will be back to the chaos before you know it.

Don 'fractal' King.