“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.” – Peter Drucker

Market turbulence just does not happen. There is a catalyst, and the catalyst is a surprise turn of events. Now there are investment surprises everyday, the difference between expectations and realized results. A surprise creating market turbulence is more than just a micro surprise associated with a company but is a signal of a macro regime change.

Turbulence is an outlier for the set of relationships across all asset classes. It is not just higher volatility but a change in cross-market correlations and relationships. It could be correlations going to one or a change in monetary policy that signals a macro change in liquidity. The change occurs at a time of market extreme like periods of high leverage or market views tilted in the opposite direction that causes significant portfolio rebalancing. The time length of the turbulence will depend on how fast the market can adjust portfolio holdings. A more uncertain cause will lead to a longer period of turbulence. A more radical change will lead to greater amplitude of turbulence.

A regime change means that the model of yesterday cannot be applied tomorrow. The linkages from the past regime no longer exist. Acting with an old model of reality will only increase the cost of the turbulence. Acting with a new model will provide for turbulence profits.