Two Ways to Prepare for “Tail-Events”

With bond yields and stock markets in the world’s major developed economies petering away, more people are asking: Where can we find investment returns? Wall Street’s answer: Emerging markets. The long-term growth prospects in emerging markets are certainly attractive. But with the propensity for another round of global economic crisis and the intertwining of economies, the risk associated with those investments is quite high. The economic outlook for major economies has deteriorated rapidly. That means we’ll almost certainly see more shocks or “tail-events” in financial markets. And given the nature of the economic crisis — one defined by unsustainable debt — history suggests those shocks will come in the form of sovereign debt defaults and currency devaluations. These types of events by definition are thought to be “low probability” occurrences. But as we’ve seen…