Thursday, July 17, 2014

Malaysian Airliner goes down near the Ukraine

I know this news is already everywhere but we need to look at it how impacts what we follow here. Before making any comment, let's express sympathy for the lives lost and the families of those on board. This is a horrible tragic event. Our prayers are with all who have suffered loss.

We will not make any attempt at all to speculate on what or who caused this tragedy. Already theories are all over the media. Assuming the plane was actually shot down we will likely enter the "fog of war" on this event. There will be claims and counterclaims as to who was responsible and why it was done.

That is not our job here. Why this event could be important here is that it is possible it could lead to a broader war in that region. We also have another hot spot in Isreal right now. We see how markets reacted to all this today. Gold shot up and the stock market dived.

So today is perhaps a mini example of what we mean here when we talk about an unforseen "black swan" event that triggers a systemic crisis. We don't yet have a systemic crisis, but this is how quickly an event can start a chain reaction. Jim Rickards calls this "complexity theory" where things in the financial system are so complex now that any unforseen event can trigger system wide reaction that is not anticipated and can't be planned for.

This is why we must stay alert and understand how things connect. An airliner shot down today might lead to a regional war tomorrow. That might lead to a sharp market dive. That might trigger a chain reaction in the derivatives markets that could take down a large financial institution. Then the counterparties to that large institution might be in trouble, etc.

All this can happen very quickly and it is very important to understand the connection of seemingly unrelated events in a complex system. Rickards explained this in detail in a recent interview you can read here. Here is just one Q&A from this June 25th interview:

JW: One consequence of the complexity you describe is that the whole system is vulnerable to malicious intervention. For example, one of the themes in your new book is intervention by what we might call financial terrorists. That’s a pretty big topic perhaps we can explore in detail another day, but would you show us now how a relatively small attack on the markets could trigger a whole meltdown across the planet?

JRickards: Yes, capital markets are vulnerable to malicious acts and financial warfare. I think we’re actually in some danger of that today as the U.S. escalates sanctions against Russia. Russia is not a passive or immaterial player; they’re capable of pushing back. In fact, Putin and others in Russian leadership have already said they would. So there’s some danger of causing a meltdown with this back and forth between Russia and Untied States, but to your point about how very, very small triggers cause a catastrophic meltdown or collapse, that is completely characteristic of complexity theory and complex systems.
It’s not true of equilibrium systems. Going go back to my analogy of the plane, it’s not just an analogy; a plane is a good model of an equilibrium system. You might hit a little rough air and the passengers might get bounced around a little bit, but it doesn’t mean the plane falls out of the sky. That’s an example of how small things don’t actually impact equilibrium models that much. Just the opposite is true in complexity. The most cataclysmic outcomes occur from very, very minute — actually impossible to perceive or measure — changes based on initial conditions.
I hope nothing worse comes from this horrible event. But it does clearly illustrate why we have to stay alert and informed. 

Update 6:20pm: And here comes the "fog of war" mentioned above. Everybody denies firing at the plane but claims to know the other side did. A quote from this article:

"Ukraine accused pro-Moscow militants, aided by Russian military intelligence officers, of firing a long-range, Soviet-era SA-11 ground-to-air missile. Leaders of the rebel Donetsk People's Republic denied any involvement and said a Ukrainian air force jet had brought down the intercontinental flight."

And then we have Russia Today hinting that maybe Putin was the target. Usually, we the people, never find out what really happened.

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