The Price Of Certainty

Financial models try to account for risk and certainty but there are occasional “black swans” which can blindside even the brightest...

I attended a meeting last year which was memorable for only one reason. Certainty. The pretext for the meeting was the potential use of innovative data analytics to monitor modeling risks in the field of aircraft leasing. The aircraft leasing industry is rightly considered a genuine Irish success story that has ridden many challenges. So, I was a tiny bit struck by the confidence of the lead analyst in that 2019 meeting declaring his absolute confidence that its sovereign customers were unlikely to ever default and therefore he didn’t need any additional macro analytics on government credit or currencies. His certainty was based on a conviction that the last thing any government would want was a suspension of air travel to and from its national territory. Ehh, hold my Corona….

All financial models try to account for risk but there are occasional “black swans” which can blindside the brightest. That’s why most investors look for some valuation comfort or a margin of risk. We do not mean to pick on aircraft leasing per se but it has certainly triggered a wry recollection while the Coronavirus threatens to shut China’s airspace from the rest of the world. Yep, the world’s second-largest economy is on lock-down and oil consumption is already estimated to have fallen by a quarter.

Ecowarriors will be thrilled; OPEC and central bankers are extremely anxious. This virus can’t even be considered a “black swan” given previous SARS outbreaks in 2002-2003 so let’s hope aircraft leasing models have factored in significant economic damage at the sovereign level. It’s not necessarily China we are talking about. It will be poorer Asian and Latin American nations dependent on Chinese trade. This is already causing the Brazilian real and other emerging market currencies to hit new lows. Meanwhile, “certainty” is evident elsewhere across a number of financial markets. Here are a few high profile examples:

  • Apple is now worth more than Germany’s entire stock market. It is incredible that the future of Apple (all equities discount the future) outstrips the entire corporate prospects of the leading exporting nation on the planet.
  • Bonds continue to hit new valuation highs as yields go lower. Again, a multi-year perspective would hesitate in declaring inflation effectively dead. Black swans and all that…..
  • US stock markets continue to roar to new valuation highs oblivious to the fact that China is a vastly more significant player in the global economy than it was during SARS time when the S&P 500 dropped 16% in a 5 month period.


Returning to aircraft leasing one can’t help noticing that other trends are less than helpful. Take your pick from climate change, carbon/gas emissions targets, ESG investing criteria and populist (anti-globalism) electoral trends. In some ways the Coronavirus is already a global carbon tax, killing off 3 million barrels of oil demand in a matter of weeks. It’s possible the first significant financial impact of the Coronavirus will be a commodity or oil-producing nation defaulting on debt payments. This will test my aircraft leasing friend’s assumptions.

It is true that a country would be loath to destroy its credit rating in the aerospace market. However, Greece is the word these days for credit doomsdayers. Remember how Greece was “certain” to take decades to return to the bond market. Take a sip of that Corona and note that Greek 10 year bond yields have traded as low as 1.15% in recent days. That’s a 0.45% cheaper rate of borrowing than the U.S. of A!

The price of certainty can sometimes be rather embarrassing and painful…


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