Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets

CHAPTER 4Stretch to Farthest Point Known: Thoughts on a Hyperinflation Event

At most points in time and space, predictions tend to fail—except the lucky ones. So it’s good to think through scenarios that one would even consider extremely remote. Active risk management means that low-probability, high-catastrophic-outcome tail events must be hedged and, just as important, gain exposure to those pesky black swans in ways that lead to advantage. To accomplish this, it helps to obtain a quantitative sense of their impact—to get a “feel for the cloth,” as a wise former boss of mine used to say. So let’s try here.

HYPERINFLATION AND CURRENCY CRISIS

What if the Fed more than succeeds in reflating and the end result is hyperinflation? As remote a possibility ...