Consider how asset bubbles are depicted in the World Economic Forum’s 2016 Global Risk Report:
A layperson looking at this map might conclude the following:
1) Asset bubble risk in general can be easily measured, classified and compartmentalized.
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2) Asset bubble risk in China, Canada or Australia should have a minimal impact on countries thousands of miles away.
3) Asset bubble risk in China, Canada, Australia and Greenland (!) has the potential to endanger the whole world because of their collective, massive size.
You’re not alone in thinking these conclusions don’t make sense. You’re also not alone in asking why the WEF would use a Mercator projection to depict the diversity, complexity and fluidity of today’s global risks. This graphical device, while easy to use as a color scheme given the neatness of its boundaries, distorts representations of risk in the same way it distorts land masses.
With that said, take a moment and study the following image…
…and this one too.
Both are “Dymaxion” projection maps. This type of projection rearranges the pieces of a three-dimensional globe into triangles to minimize land mass distortion and, more importantly, show the Earth as “one island.”
Admittedly, it takes some time to adjust to the designer’s idea that there’s no “right way up”; that there is no “North” versus “South or “East” versus “West,” but that’s the intention of a Dymaxion map. Whether you’re looking at human migration patterns over 75,000 years in the first map or the global flight routes of Emirates Airlines in the second map, this projection makes it easier to “see” how people and objects can move from one point of the Earth to another without reservation or discrimination.
Financial risks, such as asset bubbles and contagion, should be represented in a similar manner – dynamic “flows” highlighting the bursting of an asset bubble in one key country or region and the myriad transmission channels of risk(s) to other markets across the world. This is a case where we need a picture that’s worth a thousand words.
In a financial crisis, fear doesn’t know latitude, longitude or time zones. It doesn’t discriminate between “developed” and “emerging” countries. Right now, global financial markets are suggesting that we’re all on one island – let’s call it Atlantis – with no escape route in sight.
As market veterans know all too well, and as financial history teaches us, the popping of asset bubbles and ensuing bouts of contagion can manifest themselves suddenly and violently, anywhere in the world. We know that bubbles are notoriously difficult to measure as they balloon and very difficult to clean up once they burst. We also know that contagion is not an emerging markets-only phenomenon – the global financial crisis of 2008 and subsequent peripheral European crisis rendered that notion obsolete.
Instead of relying on a 16th century representation of the world to think about today’s global risks, policymakers should embrace a more updated, radical visualization to remind themselves of what’s at stake, and the danger of cognitive dissonance and inaction.
Sometimes it takes two maps to find your way.