Dimensions of uncertainty

The past 6 months have been like a phony war – you know bad things are happening but there is little immediate personal damage for most of us. Even in the area in which we work – markets – the February crash has already been more or less retraced, and yet many people point to the disconnect between markets and the real economy as a source of uncertainty.

In financial markets, uncertainty assumes quantifiable dimensions – risk, volatility, likelihood of capital loss. But despite the size of the uncertainty problem about financial markets, it’s only one dimension of uncertainty which so many of us face.

Alan Kohler, recently writing in The Australian, pointed out that conservative assumptions about the impact of unemployment on the mortgage market (15% of mortgage holders are now unemployed) could wipe out the capital base of Australian banks. For investment managers, this is an investment issue of knowable dimensions – for families living through this as borrowers, the potential disaster is looming and personal.

If there is one thing that the past few months have taught us, it is that uncertainty can manifest in a number of ways that occur simultaneously and are often interrelated. The past six months have shown that financial markets, economics, jobs, health, our place in the world, basic political principles – all the fundamental tenets which enable us to say “This is who I am” – appear to be simultaneously unmoored.

The pandemic has really made us face the fact that there are fundamental issues facing us that we share with others, not just in our family or our state, but across the world. My son is concerned that if any of the other 50 or so people who work in the same restaurant group he does test positive, they could all lose their jobs.

This is genuine risk – things that previously seemed stable or controllable no longer are. The source of risk is something outside our control or rational decision making – the financial metrics we can apply in portfolio decisions don’t apply when the likelihood of occurrence is random and severe.

So when we get through this, as I’m sure we will in due course, how will we and our clients view risk and uncertainty? Will we approach life in a fatalistic way? Will we think “whatever happens, the government will see us through”? Will it make us less willing to take risk? I’m not certain.