The fragility of stability: Why calm periods breed crisis

Key takeaways

• Stability breeds fragility - long periods of low volatility encourage complacency. Systems become overly optimised, removing buffers and making them more vulnerable to sudden shocks.
• Volatility is necessary, not harmful - frequent, smaller disruptions act as a reset mechanism, forcing economies and systems to strengthen rather than drift into fragility.
• Resilience requires a different mindset – and portfolio - strategic autonomy demands investment in energy, infrastructure, defence and commodities, while higher volatility compels an allocation to hedging.

A great paradox of history is that stability is an exquisitely camouflaged trap. As the economist Hyman Minsky famously observed of financial markets, long periods of peace and prosperity do not fortify a system, they rot it from within. Stability contains the seeds of its own destruction because participants in the system come to rely on low variance; they optimise for a very specific set of circumstances, in turn making the system and their role within it increasingly fragile. This is the case in biological systems as it is in human-based social structures.

Human beings are discounting machines, often treating the recent past as a permanent guarantee of the future. In investment, this manifests as the great illusion of predictability. Decades of artificially low interest rates and suppressed volatility convinced investors that risk had been permanently conquered. But when volatility is absent, complacency thrives. Capital ceases to look for safety and instead searches for efficiency. Investors optimize and redundancy – the engineering concept of duplicating critical components with the aim of increasing reliability – is discarded as an expensive luxury. The system becomes hyper-efficient, leveraged, and brittle.

We see parallels in other human systems – global politics, for example. The long peace following World War II enabled much of the western world to climb well into the upper half of Maslow’s hierarchy of needs (ascending from Physiological (air, water, food, shelter) through Safety, Love & Belonging and Esteem to Self-Actualisation). In international politics, safely insulated from the harsh realities of existential conflict, western societies normalized peace. We forgot what volatility and real threat looked like, and this vacuum of struggle a precarious complacency took hold. Meanwhile in domestic politics, the populus demands ever more from the state and forgets that the social contract includes personal obligation to go with the rights and duties afforded the individual.

We must invert how we view disruption.

At a systemic level, volatility is not a defect; it is a necessity. Instability and unpredictability are the harsh but vital forces that compel us to build redundancy back into our economic and political frameworks. Frequent, manageable shocks shake us out of our complacency. They force corporations to deleverage, governments to secure critical supply chains, and individuals to reclaim personal responsibility. Without regular bouts of volatility to clear out the deadwood and test our defences, the system simply optimises until a change to the system itself triggers a systemic failure – or, at least, a failure of the optimised species inhabiting it.

Investing for this world requires a shift of focus back to the physical domain: energy production, transmission and storage; road, rail and other infrastructure; the materials intrinsic to the buildout; defence capabilities and domestic production. From a portfolio construction perspective, it requires diversification – across macro factors, not simply asset class, domicile or sector – and portfolio hedging, to protect against the unpriceable black swan. 

Our multi-asset strategies include investments in the energy complex, infrastructure, defence, domestic industrial & manufacturing beneficiaries and the commodity complex. The strategies are diversified across macro variables, and we include hedging strategies in every mandate we manage on the Multi-Asset Team.

Glossary

Volatility
The degree of variation in markets or systems over time. While often seen negatively, it can play a crucial role in maintaining long-term stability.

Black swan event
A rare, unpredictable event with severe impact that markets struggle to anticipate or price, highlighting the importance of diversification and protection strategies.

Redundancy (engineering concept)
The inclusion of backup systems or capacity to improve reliability. In finance, this refers to holding buffers or diversification, often sacrificed during stable periods.

Portfolio hedging
Investment strategies designed to reduce risk by offsetting potential losses, often using diversified assets or financial instruments.