A quick look at the resilience of the major indices on December 19-th, 2014. The analysis is performed on a daily basis, we report the situation we have registered after the markets closed yesterday.
FTSE.MIB – 63.7%
SSMI – 81.5%
FTSE – 64.5%
CAC40 – 44.6%
DAX30 – 76.3%
HSI – 68.9%
STI – 73%
NASDAQ100 – 63.7%
DJA – 75.3%
DJI – 74.1%
S&P – 73.7%
Finally, a look at the entire global financial system, via the Global Financial Resilience Index (GFRI). The GFRI is a meta-index, i.e. an ‘index of indices’, which measures the resilience of the global financial system based on the daily values of the indices composing it. Essential to the global investor, the GFRI measures the ‘financial temperature’ of the entire international financial system, in particular its ability to absorb shocks, contagion or other destabilising events.
GFRI (Global Financial Resilience Index):
GFRI – 62.2%
An interactive Complexity Map of the GFRI may be navigated here.
The low value of 62.2% points to a system which is not well equipped to absorb shocks. By examining the resilience measures of the various indices one would not expect that an ensemble of markets with relatively high resilience (with the exception of the CAC40) would yield such low resilience when analyzed as a system. In fact, while the US and Asian indices are pretty much close to a reassuring 70%, it is the EU that shows values which scattere from 44% to over 80%. This clearly points to the EU as being, today, the weak link in the chain. Moreover, the degree of interdependency of the global financial system is 56%. That is high. What it means that contagion, if any, will propagate fast.
The fundamental message, once again, is this: don’t think that a system of apparently healthy components must necessarily be healty. This is easy to explain. What makes a system sometimes difficult to understand (and govern) are the interactions between its components. In the GFRI we take into account 39 of the World’s major markets. The number of interactions between these 39 indices today is 294! Does anyone ever study them all? Besides, tomorrow this number will certainly change. The conclusion is one. In a fast, non-stationry, turbulent (and crippled) economy, predictions are futile. One should focus on studying the dynamics of the system as a whole, try to understand it and identify any potential concentrations of fragility.