Years ago, the science fiction writer Ray Bradbury wrote a short story called A Sound of Thunder in which safaris into the future were possible, but time-tourists were warned not to disturb anything. After one trip, the group arrived back to discover the entire world was different – because one tourist had accidentally stepped on a butterfly. That tiny event magnified over the years and changed the future. It also gave rise to the phrase “the butterfly effect”, the idea that the flapping of a butterfly’s wings in one part of the world could cause a hurricane on the opposite side of the globe.
In capital markets, there is always the danger of the butterfly effect, and nothing demonstrates this better than the 1998 default by Russia, which formed part of the larger emerging market crisis of the period. Interest rates shot up all around the world, and South Africa, with its tradable currency and comparatively open economy, got unfairly thumped. Even the dollar slumped 10%…
