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MANAGING EMERGING SYSTEMIC RISK
1
Alan Laubsch
Director, VP of Risk Products
View of smoke plumes emitted from the Syncrud...
2
Market linkages Clustering
Bilateral exposure data Asset price data Balance sheet data
Financial Cartography reveals con...
3
How can we best manage emerging
systemic risk?
As in healthcare, our best chance lies is early detection
Source: MULTIPL...
4
GLOBAL ENERGY MELTDOWN
5
What Precipitated the Energy Tipping
Point in 2014?
Systemic implications?
6
Canary in the coal mine: Energy
7
Classic contrarian phase transition
1. Low vol (complacency)
2. Peak prices
3. … and then an outlier
8
24 June Risky Business Report
9
Divestment Tipping Point
Litterman believes an immediate risk
that investors should address is the
potential for "strand...
10
Train Wreck
Source: Bob Litterman: The Price of Climate Risks
11
Stranded Asset Swap
Source: Bob Litterman: The Price of Climate Risks
12
22 Sep 2014: Rockefellers Divest
“John D Rockefeller, the founder of Standard Oil, moved America
out of whale oil and i...
13
9 Oct Risk Crescendo
14
Oct 9 Energy as worst performer
15
Oct 9 Energy EAFE correlation
16
28 Nov Black Friday
17
28 Nov Black Friday
18
Given inevitability of carbon pricing, was
OPEC’s decision surprising?
Given that we have
exceeded safe levels of
atmos...
19
Black Friday cascaded into 10-15 Dec
EMBI & Russia Crisis
20
15 Dec Oil & EMBI correlation peaks
21
Predictive Stress Black Fri 28 Nov 2014: -
3sd Oil & Energy
22
Predictive Stress 9 Oct 2014:
-3sd Oil & Energy
23
Systemic Risk Escalating in 2015
24
Energy & Junk bond correlation still high
25
30 Jan: Oil up 6.6% but bottom unlikely
Dead Cat Bounce?
26
Predictive Stress 30 Jan 2014:
-3sd Oil & Energy… some decoupling
27
Energy (XLE) vs S&P 500
Asymmetric downside beta since 24 Jun 2014
Peak Energy
28
SUMMARY & CONCLUSIONS
29
Subprime Energy Bubble Bust
Carbon intensive industries/countries most vulnerable
- Equity, Credit, FX.
- Commodity bub...
30
Disruptive Energy “Dragon Kings”
The future is already here. It’s just not very evenly
distributed. - William Gibson
Al...
31
Adaptive Stress Testing
Source: Wikipedia; see Geoffrey Moore’s “Crossing the Chasm” (1999)
32
Conclusions
1. See a Connected Picture of Risk
2. “Sense and Respond”
3. Amplify Social Intelligence
33
FNA
Alan Laubsch
Director & VP of Risk Products
alan@fna.fi www.fna.fi
Thank You
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Systemic Implications of the Energy Meltdown

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What drove the global energy collapse? We focus on the tipping point in energy markets in 2014, which cascaded into a Subprime Energy Bubble bust with major systemic risk implications going forward. More info at
http://www.prmia.org/civicrm/event/info?reset=1&id=6562

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Systemic Implications of the Energy Meltdown

  1. 1. MANAGING EMERGING SYSTEMIC RISK 1 Alan Laubsch Director, VP of Risk Products View of smoke plumes emitted from the Syncrude upgrader plant north of Fort McMurray, northern Alberta, Canada. Photograph: Jiri Rezac/Jiri Rezac. Source: guardian.com Systemic Implications of the Global Energy Meltdown
  2. 2. 2 Market linkages Clustering Bilateral exposure data Asset price data Balance sheet data Financial Cartography reveals connected risks and hidden patterns Central nodes
  3. 3. 3 How can we best manage emerging systemic risk? As in healthcare, our best chance lies is early detection Source: MULTIPLE SCLEROSIS: ORIGIN OF ABNORMAL CELLS FOUND, UC DAVIS (2011)
  4. 4. 4 GLOBAL ENERGY MELTDOWN
  5. 5. 5 What Precipitated the Energy Tipping Point in 2014? Systemic implications?
  6. 6. 6 Canary in the coal mine: Energy
  7. 7. 7 Classic contrarian phase transition 1. Low vol (complacency) 2. Peak prices 3. … and then an outlier
  8. 8. 8 24 June Risky Business Report
  9. 9. 9 Divestment Tipping Point Litterman believes an immediate risk that investors should address is the potential for "stranded assets," or energy sources companies will not be able to harvest as the cost of oil, natural gas, coal and other fossil fuels increase from carbon-related taxes. "It's a risk management issue. Fossil fuel companies aren't evil or bad— they're acting rationally given the wrong incentives. The incentive to emit is not being penalized today," Litterman said during a panel discussion on money management in the face of global warming. "The risk that investors have in their portfolios is not climate risk, per se, it's the risk that assets will be repriced because appropriate incentives are created globally to conserve on emissions."
  10. 10. 10 Train Wreck Source: Bob Litterman: The Price of Climate Risks
  11. 11. 11 Stranded Asset Swap Source: Bob Litterman: The Price of Climate Risks
  12. 12. 12 22 Sep 2014: Rockefellers Divest “John D Rockefeller, the founder of Standard Oil, moved America out of whale oil and into petroleum….We are quite convinced that if he were alive today…he would be moving out of fossil fuels and investing in clean, renewable energy.”
  13. 13. 13 9 Oct Risk Crescendo
  14. 14. 14 Oct 9 Energy as worst performer
  15. 15. 15 Oct 9 Energy EAFE correlation
  16. 16. 16 28 Nov Black Friday
  17. 17. 17 28 Nov Black Friday
  18. 18. 18 Given inevitability of carbon pricing, was OPEC’s decision surprising? Given that we have exceeded safe levels of atmospheric CO2, carbon pricing or limits are inevitable. Paradoxically, until these costs are imposed, producers will keep pumping
  19. 19. 19 Black Friday cascaded into 10-15 Dec EMBI & Russia Crisis
  20. 20. 20 15 Dec Oil & EMBI correlation peaks
  21. 21. 21 Predictive Stress Black Fri 28 Nov 2014: - 3sd Oil & Energy
  22. 22. 22 Predictive Stress 9 Oct 2014: -3sd Oil & Energy
  23. 23. 23 Systemic Risk Escalating in 2015
  24. 24. 24 Energy & Junk bond correlation still high
  25. 25. 25 30 Jan: Oil up 6.6% but bottom unlikely Dead Cat Bounce?
  26. 26. 26 Predictive Stress 30 Jan 2014: -3sd Oil & Energy… some decoupling
  27. 27. 27 Energy (XLE) vs S&P 500 Asymmetric downside beta since 24 Jun 2014 Peak Energy
  28. 28. 28 SUMMARY & CONCLUSIONS
  29. 29. 29 Subprime Energy Bubble Bust Carbon intensive industries/countries most vulnerable - Equity, Credit, FX. - Commodity bubble bust? Materials 2n order effects: Financials exposed to Energy & Materials? Utilities? Liquidity risk. Monitor systemic risk & focus on early warning
  30. 30. 30 Disruptive Energy “Dragon Kings” The future is already here. It’s just not very evenly distributed. - William Gibson Alternatives Divestment Carbon Price
  31. 31. 31 Adaptive Stress Testing Source: Wikipedia; see Geoffrey Moore’s “Crossing the Chasm” (1999)
  32. 32. 32 Conclusions 1. See a Connected Picture of Risk 2. “Sense and Respond” 3. Amplify Social Intelligence
  33. 33. 33 FNA Alan Laubsch Director & VP of Risk Products alan@fna.fi www.fna.fi Thank You

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