What's the Worst that Could Happen?

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What's the Worst that Could Happen?

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Drew Matus
FEB 25, 2021

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The past is prologue

2020 began with most market participants focused on the prospect for a recession in 2021, likely driven by traditional business cycle dynamics or a trade war. No investment house was predicting a global pandemic or noting the risk of a pandemic. While this is forgivable, it is useful to note that a pandemic forecast would not have been unreasonable. Since 1889, there had been five global pandemics not counting COVID-19 – the 1889 Russian Flu, the 1918 Spanish Flu, the 1957 Asian Flu, the 1968 Hong Kong Flu and the 2009 Bird Flu. In recent times, other viruses had also emerged and caused regional concerns including SARS, MERS, Ebola and Zika. There had been a pandemic roughly every 26 years, or a 3.8% chance that 2020 would be a year that saw a pandemic. In the defense of analysts everywhere the time between pandemics has ranged from 11 to 41 years making the emergence of COVID-19 quite quick from a historical perspective.  

Lions and Tigers and Bears…oh my!

Other natural events also occur with some frequency including, but not limited to, volcanic eruptions, solar flares and earthquakes. Available history suggests we will have either a
large volcanic eruption, a severely disruptive solar flare, a large earthquake or a pandemic roughly every nine years.1

Volcanic Eruptions

Since 1600 there have been ten severe volcanic eruptions, which we define as a minimum of “6” on the “Volcanic Eruption Index” scale, a logarithmic scale ranging from zero to eight.2
The largest eruption in modern history, Mt. Tambora in 1815, reached a “7” on this scale. The remaining nine eruptions are all estimated to have been a “6” on the scale. This suggests we can expect a volcanic eruption reaching at least a “6” on the VEI scale roughly once every 42 years for a single year risk of just under 2.4%. However, like pandemics, they do not occur with regularity. The minimum seen between events has been as low as 11 years but the world has gone as long as 123 years without witnessing an eruption of this magnitude. It has
been 39 years since the last major eruption in 1991.

How meaningful can a volcanic eruption really be to the modern world? The eruption of Mount Pinatubo in 1991 lowered global temperatures by a noticeable amount.3 Smaller
eruptionshave recently led to widespread flight cancellations. Indeed, history has shown that significant volcanic eruptions, particularly those that created an impact on global temperatures, can prove quite disruptive as they impact weather and, relatedly, food
production. Relatedly these impacts can also prompt social strife.

Solar Flares

In 1859 the Earth was buffeted by a solar flare in an event now known as the “Carrington Event”. The event disrupted telegraphs and created Auroras intense enough for people to read by. In 1921 a similar event also created widespread disruptions to communications, disrupted train signals and caused some fires and destroyed fuses. A smaller flare in 1989 resulted in a widespread blackout in Quebec. A 2012 flare which is believed to have been as significant as that of the Carrignton Event narrowly missed the Earth.4

Scientists have estimated that a significant solar flare, defined as -500nT or larger, hits the earth once every 25 years on average giving the probability of a solar flare hitting the earth as 4%. Those same scientists estimate the probability of a Carrington-type event reoccurring in any given year as 0.7%.5

Flares are more likely to occur during periods of increased sunspot activity that are seen during solar maximums. The next solar maximum is expected in mid-2025.6


Earthquakes occur with a relatively higher frequency than either volcanic eruptions or solar flares but can have a substantial impact on regions impacted by them. Since 1900 there have been 21 Earthquakes recorded at an 8.5 or higher on the Richter scale, the logarithmic scale used to categorize the severity of the earthquake. Five of these earthuakes have been recorded at 9.0 or higher.This would mean the probability of an earthquake of 8.5 or greater is 17.5% in any given year and the probability of a 9.0 or higher quake is 4.2%.

The shortest gap between these quakes is less than one year while the longest gap has been 39 years. For earthquake of 9.0 or greater the range is between four and 40 years. It has been eight years since an earthquake of 8.5 or greater.   

Known Unknowns

We belive none of these events are both highly likely and also likely to create an impact large enough to upset the economy. Most of these events never rise to a level that creates worldwide disruption.  They are normally background noise against the focus on man-made disasters and the potential for even more man-made disasters in our view. Still, when taken together, the probability of either a pandemic or a volcanic eruption or a consequential solar flare or an earthquake is roughly 11%, or roughly one year in nine.8

The complete story is difficult to tell as the impact of the event is often the result of non-natural events preceding the natural event. For there to be true disruption the volcanic eruption must push enough ash into the atmosphere to not only disrupt nearby air traffic but to disrupt agriculture by altering weather patterns. Throughout history volcanic eruptions may have been the catalyst for famines and droughts that culminated in political instability and revolution. Other similar eruptions at a different time may have had only modest effects.

A solar flare that disrupts communications or causes a short-term blackout is largely an annoyance. However, a Carrington-type event buffeting a world dependent on communications, GPS and other technologies could lead to long-term disruptions of the economy. One study noted that a similar storm would place 20-40 million people in the United States at risk of an extended outage of electricity for between 16 days and two years. The estimated cost for a storm of that magnitude in 2013, the time the paper was written, was between $600 billion to $2,300 billion.9

Earthquakes are not necessarily driven by their size but rather by the ability of the affected area to absorb the shock. Hence, some of the most damaging earthquakes have registered far below the 8.5 threshold used here. Nevertheless, consider the impact of a significantly larger earthquake on the same location where widespread damage has occurred with an earthquake of lower intensity.

Finally, when we finally emerge from the COVID crisis it seems likely that the clock will start ticking on the next pandemic, as they occur with some regularity. More worrisome may be that the world will focus on the possibility of future pandemics to the exclusion of the other naturally-occurring phenomena resulting in greater loss than otherwise could have been the case.


What's the Worst that Could Happen?