Historically speaking, economic crises ordisasters natural or man-made have neveroccurred in isolation. There have alwaysbeen warning signals which, many a times,were not heededExtreme events do not come out all of a sudden;their trend and information are alwaysavailable through data points. However, thosedata points are often ignored and it is believedthat nothing will happen, but...
Historically speaking, economic crises or
disasters natural or man-made have never
occurred in isolation. There have always
been warning signals which, many a times,
were not heeded
Extreme events do not come out all of a sudden;
their trend and information are always
available through data points. However, those
data points are often ignored and it is believed
that nothing will happen, but that ignorance
has been proven to be costly in the past. If any of those
past extreme events are analyzed, it could be found that
the vital signs were available but ignored, resulting in a
disaster/crisis.
In the sinking of the Titanic in 1912, it was “overconfidence”
about the ability of the ship not to sink keeping few
lifeboats and that too for other sinking ships.
The Chernobyl disaster in 1986 in USSR was a combination
of a design fault, safety system intentionally turning off,
and safety negligence.
In the Bhopal gas tragedy in India in 1984 where thousands
of people died and health of millions got affected due to
the emission of a poisonous gas in the atmosphere, the
prime cause was a reduction in maintenance expenses
by the management, leading to poor upkeep of the plant.
The Indian government and local activists argued that
slack management and deferred maintenance created
a situation where routine pipe maintenance caused a
backflow of water into a tank, triggering the disaster.
Union Carbide Corporation contended that water entered
the tank through an act of sabotage.
The Wall Street crash in 1929 in the US leading to the
beginning of 12 years of the great depression was not
without warning signals. Prior to this crash, the world
was recovering from the First World War, the American economy showed ominous signs of trouble with declining
steel production, construction was sluggish, automobile
sales were down, and consumers were building up high
debts because of easy credit available. Despite all these
economic troubles, the stock market was showing signs of
high and the gains continued almost unabated until early
September 1929. The market had been on a nine-year run
that saw the Dow Jones Industrial Average increase in value
tenfold, peaking at 381.17 on September 3, 1929, shortly
before the crash.
The dot-com bubble had a similar story during 1999-2002
when the Internet and World Wide Web (www) was getting
popular. At that time, investors were eager to invest in any
venture that had Internet or “.com”, and venture capitalists,
eager to profit on this investment demand, moved to raise
and invest capital faster and with less caution than usual.
A combination of rapidly increasing stock prices, market
confidence that the companies would turn future profits,
individual speculation in stocks, and widely available
venture capital created an environment in which many
investors were willing to overlook traditional metrics, such
as P/E ratio, in favor of basing confidence on technological
advancements.
A very recent 2008 economic crisis is still fresh in the
memories of people on the back of skyrocketing home
prices in the US, cheap credit which made it too easy for
people to buy houses or make other investments based on
pure speculation lending loan without collaterals, private
equity firms leveraged billions of dollars of debt to purchase
companies and created hundreds of billions of dollars in
wealth by simply shuffling paper but not creating anything
of value.
In all abovementioned examples of economic crisis over
a short history of last 100 years, there were clear signals
of extreme optimism or a sudden rise in a particular
phenomenon (dot-com) prior to the debacle. The public just
followed the general public sentiment and kept investing
in any market that gave them return (stock market or
housing) in a hope to book quick profit. Even for other
disasters, there were good reasons that were not well read
by the people/management. There are many other examples
in the history proving that extreme events do not occur in
isolation without warning signals. The warning signals may
come from many sources. In today’s world, global warming
is impacting the weather conditions worldwide, which is a
signal of a possible debacle that may be sitting in store, and
should not be taken as an extreme event, if it occurs.
The information available in the world at a point of time
if analyzed properly may give an indication of tomorrow’s
debacle. The efficient market hypothesis developed in the
1960s in financial economics states that asset prices fully
reflect all available information. A direct implication is that
it is impossible to “beat the market” consistently on a riskadjusted
basis since market prices should only react to new
information.
Similar to the stock price, all data available in the world
till today carries all information about possible tomorrow’s debacle. Such information is in an advanced stage of
development and may be observed in the five fundamental
building blocks of our existence. These five building
blocks are Earth (Birth), Air (Life), Water (Growth), Space
(Purpose), and Fire (Death).
These five building blocks of existence are the key, and
information about these may act as a key indicator of any
untoward incident that may happen tomorrow. The “Earth”
is related to agriculture, useful and precious mineral
deposits, petroleum output, water deposits essential for life,
etc. It is also related to destruction through an earthquake
and volcanic eruption, etc.
The second component, “Air”, is related to life for breathing
as a key component for the survival of humans and plants
for photosynthesis; extreme pollution is linked to the
destruction of mankind, and extreme wind is related to
destruction through tornado-type events.
The third component is “Water”, again one of the key
survival components for mankind that is useful for
drinking, agriculture, etc. Excess or shortage of water is a
threat through flood or excess rain or drought impacting
the ability to drink as well as produce foodgrains.
These three fundamental components form the basis of
any economy and demography in the world. The other two
components, “Space” and “Fire”, are enablers/facilitators
for survival in conjunction with the first three elements.
The entire economic and demographic developments are
therefore a combination of the five essential components of
which humans and the world are made up of. It is impossible
that impacts on the building blocks are not made before any
major disaster.
The other ways of destruction could be from manmade
creations. In the current context, this could be due to the
use of a weapon of mass destruction or terror attack or
extreme climate conditions, human behavior such as too
much optimism, overconfidence, part of the masses, greed,
etc.
So any ominous sign of a future disaster will always be
available either individually from any one of the five
fundamental elements or in one or more combinations of
these five fundamental elements. All examples of the stated
debacles have shown the involvement of human behavior.
The Titanic incidence was due to overconfidence; the 1929
stock market crash where people followed the masses
without looking at the actual economic reality, and similarly,
the burst of the dot-com bubble was a combination of greed
and quick profit; while the 2008 economic crisis was due to
many factors of human behavior. The tragedies that resulted
in the loss of lives are attributed to either negligence, not
following the process, or management responsibilities.
None of the abovementioned debacles over the last 100
years impacted any of the individual five fundamental
elements directly, but rather, the impact was in a form of
a combination as “economy”. However, this is changing
now, and the current signs are more ominous than ever
before, coming from “Air”, pollution, change in environment leading to extreme weather conditions; “Water”, in a form
of water shortage, excess rain or drought, increase in the
acidic nature of sea impacting the coral reefs slated to
be the lifeline of the aqua world, rise in sea temperature,
etc.; “Earth” urbanization, reduction of forests, rise in
temperature, etc. These will fundamentally impact the
ability to grow food as well as have safe drinking and
places to live.
The World Economic Forum (WEF) every year since 2008
comes out with a list of risks impacting the world on
both likelihood and impact scale. These risks fall into five
broad categories of Economic, Environmental, Geopolitical,
Societal, and Technological fronts. These risks may be
compared with the fundamental building blocks of “five
elements” and “manmade” creations. Economic and
Environmental fall under the five fundamental elements,
Technological falls under manmade, and Geopolitical and
Societal are a combination of the two.
From 2008 to 2010, top five risks reported by WEF in
terms of both likelihood and impact came from Economic,
Geopolitical, and Societal risk categories, of which, the top
two risks were from the Economic category. From 2011
onwards, risks from the Environmental category started
figuring out till the latest report in 2018. Also, from 2012
onwards, a cyberattack on the Technology category started
figuring out till 2018. Economic risk was not figuring
out in the last three years. From 2015 to 2018, the key
risks coming are from the environment, geopolitical, and
cyberattacks.
Based on this observed global trend over the last 11 years
since 2008, there have been drastic changes in the top
five global risks which are clearly evident in the five key
elements of the building blocks. The air quality is getting
poor, resulting in diseases; there is a sudden eruption of air
purification market indicating the nature of pollution. At
the global level, there have been changes in the climate with
extreme cold/heat, rain, flood, etc. Similarly, information
technology and digitalization have taken over the entire
world exposing the risk of total collapse due to cyber and
similar attacks.
The way stock price carries all information, similarly, all
information available in this world carries an out likely
tomorrow, and any event that may dismantle the world
impact should not be taken as an extreme event because
signals were coming. It is a different matter that no device
is prepared to interpret such information and decipher
the conclusion. Though the mathematical, econometrics,
environmental, and seismic models, etc. are available,
neither a combination of all models nor incorporating any
human behavior is available. At times, models are more
complicated compared to using common sense that can read
an obvious writing on a wall. The need is being unbiased.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.