Blu Putnam: The elevated degree of market uncertainties relative to quantifiable risks is exponentially complicated when there are multiple major transitions happening at the same time. Let’s take an example from physics. We understand the liquid state and we understand the gaseous state. Image the transition water goes through as it boils and leaves the liquid state and turns into a gaseous state. The bubbles, or chaos in the boiling water are all at the surface or boundary of the transition. Transition analysis is exceptionally difficult and with transitions in climate, geo-politics, post-pandemic pattern shifts, inflation, and demography, just to name a few, happening simultaneously and interacting with each other, it is no wonder we are navigating a world of elevated uncertainty and struggling to quantify the risks.
Erik Norland: Heightened uncertainty puts the emphasis on more sophisticated methods of managing risky exposures, because there are often two very different and highly distinct scenarios or potential outcomes competing with each other in the minds of market participants. Markets will price the capital-weighted average of the probabilities of each potential outcome – that is, split the difference. Eventually, only one outcome will prevail, and there is the possibility that prices in an affected market might move abruptly to reflect the prevailing outcome and the resolution of the uncertainty. This particular kind of event risk may be better managed with options to deal with heightened probability of abrupt price moves rather than futures where the objective is typically to manage directional risks.
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