Don Thurston Blog

Often Heard but Never Understood

News casts frequently include “ the markets do not like uncertainty” or “ uncertainty is generating market fluctuations”. Such strange quotes considering uncertainty are the only reason that markets exist at at all.

An upward move in oil prices results in many conversations about hedging. In short is this an opportune time to fix a price now for future sales? If future oil prices were certain then there would be no hedging and an entire business would not exist. Imagine a world without hedge funds.

A potential Italian loan default rings in our ears and once again the cry goes out “ the market hates uncertainty”. Reduced to numbers this potential default shows up in bond yields. If any bond buyers emerge they will be rewarded with high yields that will reflect the uncertainty. They do not hate this uncertainty, they thrive on the opportunity provided. Imagine capital markets without a bond market.

Very recently the owners of Groupon sold a portion of their company via a public offering. By any standards, a very successful transaction for the founders, the investment bankers and the lawyers. What was uncertain is the reward for the stock buyers who were prepared to subscribe ahead of any pricing by the stock market. Their willingness in the face of uncertainty made the deal work. Imagine capital markets without a stock market.

Markets of any nature exist because transaction prices are fixed only when a deal is done. Perhaps “the market hates uncertainty” can become “thank goodness for uncertainty”. Imagine capital markets without uncertainty.

Originally published on November 13th, 2011

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