The world has changed pretty dramatically in the past 12 months.
We've moved from an era of globalization to one of nationalism and populism. There has been a shift from fears of stagflation to one where inflation is the buzzword. Davos Man has lost the ascendancy, and now Joe Six Pack is in charge.
We've also moved from a world where banks, and their investor clients, manage risk, to one where they manage uncertainty.
That is a critical difference, according to Andrea Orcel, president of UBS' investment bank. Whereas risk can be modeled, hedged, and planned for ahead of time, uncertainty arrives out of the blue.
Business Insider recently sat down with Orcel, and asked whether the market had priced in some of the risks that go with protectionism. In response, Orcel said that the market probably hadn't priced in the risks, and that the trading environment had undergone a broader shift.
"What I think is more interesting is, as an industry, we have moved from trying to manage risk — where you prepare for it, you have historic series, you have hedges, you make decisions, you debate them, you plan for different scenarios — to managing uncertainty. Uncertainty is very different. Uncertainty is, 'OK, there's going to be an election. Is Brexit going to happen?' How do you judge that? If it happens, what's the consequence? How do you hedge? How do you price for actions as a result of a tweet or a throwaway comment without getting it wrong?
"It's very difficult to position your trading book — or position the bank versus client activity that is going to be coming — for events that you're just rationalizing. It's not a mathematical equation, and when they happen, you're just rationalizing what the market will do, and actually the market does the opposite. Everywhere we have this and are likely to see a lot more of this."
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