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A New Disease and An Old Syndrome

Don Curren February 4, 2020

One new disease and one old syndrome have been making their presence felt in financial markets in the past few days.

The new disease is, of course, the new mutation of the coronavirus dubbed 2019-nCoV, which had reportedly infected 14,557 people, claimed 304 lives and resulted in the lockdown of vast swathes of China by Sunday.

The old syndrome is something I’ve dubbed “Health Scare Panic Syndrome,” or HSPS. It’s not usually fatal. But it does present with several potentially dangerous symptoms including unnatural sensitivity to misinformation, a temporary shutdown of critical thought and a reversion to primitive, racist thinking in its most acute phase.

Twitter, Facebook et al have increased this tendency toward contagion, but HSPS long predates the emergence of social media. As someone who covered financial markets (and the real world) as a journalist for, well, quite a while, I’ve seen many health risk panics come and go – SARS, West Nile Virus, bovine spongiform encephalopathy (Mad Cow Disease) and its human correlate Jakob-Creutzfeldt disease, Zika, various strains of influenza, etc.

It’s been my experience that nothing generates anxiety and an all-consuming appetite for more information like a new health risk.

Unlike most phenomena that are covered in the news and come into play in financial markets, health scares can pose an existential threat to each and every one of us, so a strong reaction is not inherently irrational.

It’s easy to dismiss that reaction as a kind of unthinking phobia, but HSPS is more complex than that. Its impact on foreign-exchange markets – and indeed all asset classes and our entire collective life – make it worth delving into in some detail.

Let’s start with one of the apparent irrationalities of HSPS that’s been pointed out during the coronavirus panic. We seem to be much more scared of the coronavirus than we are of common influenza, even though the latter is a much, much bigger killer of humans. The US Centers for Disease Control says flu has caused between 12,000 and 61,000 deaths in that country annually since 2010. Coronavirus has killed precisely zero people that we know of in that country. (The graphic below also includes CDC estimates for total hospitalizations and cases.)

The difference is that we’re familiar with the flu, but coronavirus is new and therefore unknown.

It brings to mind the distinction economists make between risk and uncertainty, a distinction first made by the University of Chicago economist Frank Knight in the 1920s. Knight believed “risk” applied to situations where the outcome of a given state of affairs is not known, but we have some degree of confidence about the probabilities of various outcomes. “Uncertainty” refers to situations where we do not have the information we need in order to estimate the probabilities in the first place.

Most of us – rightly or wrongly – think we understand the risks of flu and take what we deem to be appropriate countermeasures. It’s the devil we know. None of us know or can quantify the risks posed by the coronavirus, and that’s why we worry about it.

That explains the appetite for information about coronavirus – an appetite that when uncontrolled can lead to credulous acceptance of inaccurate and possibly malicious misinformation on the Internet.

It also explains the outsized fluctuations in financial markets – particularly risk-sensitive markets such as equities – to the initial news of a possible new epidemic like the coronavirus. When you have little or on information about a threat, the best defensive strategy is to assume the worst, and then amend your judgments when more information becomes available.

Known risks can be quantified, and then discounted appropriately. Uncertainty can’t. That creates volatility that looks overwrought, but actually has some logic to it – the logic of radical uncertainty rather than conventional risk.

As nature abhors a vacuum, so our minds abhor uncertainty. Particularly when that uncertainty may conceal an existential threat of unknown magnitude. Faced with that, it makes a certain amount of sense to sell risk-sensitive assets – including currencies such as the Canadian and Australian dollars – and flee into safe-havens, in the world of foreign exchange, the US dollar, the yen and the Swiss franc.

The impulse to seek out information about an uncertain and potentially dangerous situation is unavoidable. It’s hardwired into homo sapiens – and has been ever since the days when it was mission critical to know whether the movement in the bushes was a saber tooth tiger or a squirrel.

That impulse becomes a problem is when it flips into panic and credulity. When your uncertainty sends you to the Internet and you latch on to a questionable account of the origins of the coronavirus or embrace a conspiracy theory, that’s when your HSPS syndrome is really getting dangerous.

The way to avoid those symptoms is to inoculate yourself against mental panic by a healthy injection of valid information and a big dose of skepticism and critical thinking.

The best posture to strike is one of being alert to the threat – but not paranoid about it. Alert means seeking out information, but examining it skeptically and thoughtfully, and rejecting the inaccurate and unfounded, rather than simply assimilating everything the mainstream and social media throw at you.

It means always being conscious of the fallibility of your beliefs, whether you’re deciding about buying a surgical mask or shorting the Canadian dollar and going long yen.

HSPS is a bit like one of those conditions that result from an overzealous immune system. Your belief system has to react to changes in the external environment, but over reacting – panicking and jumping uncritically on every bandwagon that rolls across social media – can bring a whole net set of dangers into play.

And at times like these, there are enough real dangers in the world. Succumbing to HSPS and multiplying them unnecessarily may be one of the unhealthiest things you can do.

Don Curren
Market Strategist and Content Editor
dcurren@cambridgefx.com
@dbcurren