Colossal Risk
Managing risk. Mitigating uncertainty. Is attempting to crack this unsolvable puzzle all just a waste of time and energy?
The Popocatépetl volcano erupted last week. It was an impressive sight. Smoke and ash, in addition to 1,500-foot-high lava fountains, spewed from the volcano’s conical, crater top.
El Popo, as the locals call it, is about 45 miles southeast of Mexico City. Roughly 25 million people live within a 60-mile radius.
The eruption prompted the Mexican government to raise the warning level to “yellow phase three.” This means residents should be prepared to evacuate.
With a little luck, the volcanic activity will subside — for now. In reality, there’s no good way to evacuate 25 million people from a single area.
For example, when panicked residents attempted to flee Los Angeles during the 1992 riots the highways quickly grinded to a halt. Enterprising vendors traversed the immobile onramps on foot, selling bottled water and canned soda pop at a hefty premium.
Thirsty evacuees had little choice. They were trapped. They had to pay up. There was no way out of the LA Basin.
About 15 years ago we rode a bus from Mexico City to the municipality of Amecameca to visit our wife’s aunt and uncle. Amecameca is about 15 miles from El Popo. The views are extraordinary.
The volcano’s peak is about 17,800 feet above sea level. By comparison, the highest peak in the contiguous U.S. is Mount Whitney, in the Sierra Nevada Mountains, which is about 14,500 feet. The highest peak in the Smoky Mountains, Clingmans Dome, stands at a humble 6,643 feet.
El Popo is, in a word, colossal.
Acceptance
The name Popocatépetl comes from two Nahuatl Aztec words. They generally translate to “smoking mountain.”
From a third story rooftop patio, many years ago, we gazed at the towering steep slopes and ultimate summit. We pondered what seemed a likely and looming catastrophe.
Yet Tío Miguel showed little concern of the potential for fiery lava to rain down from the sky. Like residents of Portland, Oregon, with Mount Saint Helens in the distance, El Popo is warmly admired for the unique topographic relief it offers.
Perhaps it’s better to accept the dangers of life when there’s nothing you can do to prevent them — if and when they happen. In the case of El Popo, you could always move away. However, you would soon discover a different host of dangers.
Then what? Do you move again … and encounter some other uncertain danger?
Still, there are times when it’s wise to take a clue from the gods and get out of Dodge.
On the morning of August 24, 79 AD, residents of Pompeii, a Roman trading town, woke up with hardly a worry in the world. Why wouldn’t they?
Pompeii had experienced nearly 700 years of uninterrupted advancement. Residents lived in large homes with elegant courtyard gardens and all the modern conveniences.
Rooms were heated by hot air flowing through cavity walls and spaces under the floors. Running water was provided to the city from a great reservoir and conveyed through underground pipelines to houses and public buildings.
Fresh fish from the Bay of Naples were readily available in the Macellum (food market) and countless cauponae (small restaurants). Entertainment was on hand at the large amphitheater.
Life was agreeable, pleasant, and idyllic for all — and it was only getting better.
Against the Gods
Yet, just when things couldn’t have seemed more certain for Pompeii, Mount Vesuvius blew. A cloud of gas and ash spewed down, instantly killing its inhabitants and burying the city under 60 feet of ash and pumice.
Nineteen hours later, where there had been life and a thriving civilization, there was silence for the next 1,669 years.
“You could hear women lamenting, children crying, men shouting,” was the account by Pliny the Younger. “There were some so afraid of death that they prayed for death. Many raised their hands to the gods, and even more believed that there were no gods any longer and that this was one unending night for the world.”
Hindsight is always 20/20. In the case of Pompeii, the warning signs were evident to those who bothered to heed them.
Seventeen years before Mount Vesuvius erupted there was a massive earthquake that damaged many of the structures within the city. Then, leading up to 79 AD, frequent, but smaller quakes occurred. Soon no one seemed to pay them any concern.
In the end, the gods had their say. One day after the Vulcanalia — the festival of the Roman god of fire — Mount Vesuvius erupted.
Today in America, as in most developed economies, another Vesuvius of sorts is releasing warning ash into the atmosphere. But most of its caution goes unheeded.
Investors, with both eyes firmly fixed on interest rates and the major stock market indexes, are blinded by the politics of the moment. Partisan squabbles over a ridiculous statutory debt limit.
At the same time, all the cool and hip investors are keen for a debt limit deal so they can get on with bidding up another bubble in technology stocks — filled with the hot air of artificial intelligence (AI).
Are they missing something?
How to Face Risk in an Uncertain World
From our perspective, the debt limit and a burgeoning AI boom are mere distractions. Decades of bad decisions have stacked up in ways that make a pain-free reckoning impossible.
With a little study and contemplation one can see the facets leading to a mega economic collapse, financial crash and complete societal breakdown coming into alignment.
Many American cities are already unlivable hellholes. Homeless drug addicts are ubiquitous, flapping their arms and flailing about on the asphalt. Youth flash mobs load up on five finger discounts with little consequences.
What chaos will there be when prices double and the unemployment rate tops 15%?
Still, what can you really do about it?
You can tie yourself into knots trying to manage your risk. You can buy put options. Regardless, there’s always uncertainty you cannot account for. So why not keep things simple?
Perhaps an equal mix of gold, cash, shares of good businesses and property will do the trick. Maybe, for kicks, set aside a few bucks to speculate on the elegant mirage of AI.
Then, with some spiritual guidance, you can get on with enjoying the good things in life.
Ultimately, you never know how it will all turn out. Sometimes winning is losing and losing is winning.
Consider Thomas Douglas Allsup. He passed away on January 11, 2017. But, if he hadn’t lost a coin toss, he would have perished on February 3, 1959 — the day the music died.
Instead, Ritchie Valens won the coin toss for the remaining seat on the fateful flight. Legend has it, he remarked, “That’s the first time I’ve ever won anything in my life.”
Soon after, the airplane Valens, Buddy Holly and The Big Bopper were flying in fell from the sky and crashed. They all died. Portfolio diversification couldn’t save them.
What’s the point?
The world is full of uncertainty and there’s nothing you can do to stop whatever it is that’s going to happen. So, to face risk in an uncertain world, make the best preparation you can, with the means available to you.
After that, enjoy the time you have and the people you have to spend it with.
As Lord William Rees-Mogg once remarked, “even our happiest moments are picnics on the slopes of Vesuvius.”
[Editor’s note: Like this article? If so, please Subscribe to the Economic Prism.]