Don Thurston Blog

Often Heard but Never Totally Understood

News casts frequently shout: “  markets do not like uncertainty” or “ uncertainty is causing market fluctuations”. These are strange comments  considering uncertainty is the only reason that markets exist at  all. A market is a summation of transactions.  For each transaction the buyer thinks the value will increase whereas each seller thinks the value will drop compared to other opportunities.  Both parties are actually uncertain of the outcome.

Consider these anecdotes.

An upward move in oil prices results in many conversations about hedging and reducing risk.  Is s this an opportune time to lock in a price now for future sales or purchases? If future oil prices were certain  there would be no hedging and an entire service industry would not exist. Imagine a world without hedge funds.

A potential Italian loan default rings in our ears.  Once again the cry goes out “ the market hates uncertainty”. This potential default pushes up bond yields. The bond buyers with guts will be rewarded with high yields that will reflect the greater uncertainty. They do not hate this uncertainty, they thrive on the opportunity provided by  it. The greater the uncertainty, the greater the opportunity. Imagine the financing of huge projects without a bond market.

Very recently the owners of Groupon sold a portion of their company via a public offering. By any standards, it was certainly a very successful transaction for the founders, the investment bankers and the lawyers.  In stark contrast, the subscribers bought the stock without the benefit of a value being set by the market. They bought it in the face of uncertainty. The value was yet to be set by the ruthless market. Their willingness in the face of uncertainty made the deal work. Imagine the financing of economic growth 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 ” uncertainty drives markets”. Imagine capital markets without uncertainty. Boiled down further:  The essence of running any business, large or small, is the ability to make decisions in the face of uncertainty.

Originally published on November 13th, 2011

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