I am reading Taleb’s Antifragile book, and I recommend it highly. He has sparked my interest in reading Greek philosophy. If anyone has any recommendations, then please add a comment below.
Woodford’s recent blog article contained a chart, which I have annotated below:
One of the lessons from Antifragile is that attempts to control volatile systems are very fragile. The chart shows some initial volatility followed by a very stable region in which exchange rates show narrow variability. That stability did not last, however. The ROX collapsed.
Fascinatingly, we see the same thing with the oil price over 5 years:
Oil prices tend to be inherently volatile. But look at the chart. The price looks almost “managed” from the period Feb 2011 to Aug 2014. Such steadiness could not be maintained be maintained indefinitely – although it was maintained for a number of years – until it finally broke.
People are trying to explain how oil has moved in terms of Saudi behaviour. Maybe that was the wrong question. Maybe the real lesson is that prices would inevitably have to break given such a long period of stability.
It also reminds me of shares that trade in a narrow range, and how much I like them, assuming I’m bullish. Narrow ranges cannot be sustained indefinitely, and when they break, they break decisively.
And here’s a curious thing from the medical profession: heartbeats are irregular. In fact, when they become completely regular, doctors become worried, because it is often a sign of a heart attack.
So actually, we may now be seeing signs that the market is returning to functioning properly; which implies volatility. Another interesting fact that high stock markets combined with a low VIX level is often construed as a sign of a market top.
Update 17-Dec-2015: I thought it would be interesting to show the 5-year chart of gold:
Here we see another region of too-stable-to-hold. Excessive stability may hold for a long time; you really don’t know how long. It also does not tell you to which side the break will be. According to Financial Post in March 2014, all-in sustaining costs are between $1100-$1200/oz. This suggests what we have here is a bottom rather than a top. This picture might be complicated by the fact that gold is store of value, so there may be a looser connection between the price of gold marginal cost of production.