When war threatens, we know that the problem is not limited to the Middle East. According to Reuters, around a fifth of the oil and liquefied natural gas transported in the world passes through there; If this route gets stuck, energy and transport costs rise and, subsequently, the price of various products. Still, at the height of the tension, many investors acted as if the disruption would be brief. F: oil still far from levels compatible with a prolonged blockade, the American stock market relatively resilient and gold not establishing itself as a security asset.
When the risk is extreme, but has not yet become a consummate damage, investors tend to treat it as too unlikely to review prices more incisively. This is the mental shortcut that Robert Barro helps illuminate in 2009, by showing that rare disasters weigh heavily on the value of assets and well-being, even when their probability is low. In other words, what matters is not the frequency of the event, but the size of the loss when it occurs. While the shock remains in the realm of possibility, many agents act as if normalization of the flow is close; when deterioration sets in, adjustment can come at once.
How investors read a new shock also depends on what they learned from previous shocks. Ulrike Malmendier and Stefan Nagel showed, in 2011, that first-hand macroeconomic experiences leave persistent marks on the willingness to take risk. This helps to understand why, after years in which many episodes of panic were followed by rapid recovery, so many people have become accustomed to seeing turbulence as a buying opportunity, not as a more lasting change of scenery. The problem is that this bias mixes very different episodes together. There are shocks that are mainly financial and narrative, and there are shocks with a harsher physical, logistical and inflationary component; each type requires different responses, so treating everything as a repetition of the past can delay the reaction.
Furthermore, investors tend to react first to what is most eye-catching. Brad Barber and Terrance Odean showed in 2008 that attention is disproportionately focused on signals that are easy to observe and trade. In an information-saturated environment, this gives more weight to negotiation rumors and sudden price movements, while pushing into the background mechanisms that take longer to appear, such as the increase in the cost of maritime insurance, the reorganization of logistics routes and the passing on of costs to inflation. It was this pattern that emerged when Trump’s talk about “productive” talks with Iran was enough to ease oil and other assets for a moment, although the slower effects of the shock remained unaddressed.
Therefore, at first, before prices reach a new level, severe shocks can be treated as if they were temporary and manageable. In the following days, part of this reading began to give way: this Monday, March 30, gold rose again and American stock markets showed only a modest recovery. So, the question to keep in mind is actually what exactly are these prices signaling: an expectation of stabilization or the difficulty of incorporating, at present, a damage that is still in the making?
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