“a rare bird in the lands and very much like a black swan” – the Roman poet Juvenal
We all desire order in the world, in society and our personal lives. It brings stability and peace of mind to know that there are unbreakable laws that govern us – that a certain cause leads to a certain effect.
For example, knowing that the law of gravity is in place gives me comfort that I won’t go floating into the sky like a bundle of balloons at some unexpected and inconvenient time. I also deeply respect that law of gravity, knowing that it guarantees my death if I jump off a twenty story building.
Unfortunately, geopolitics and the financial markets don’t seem to be subject to laws as immutable as gravity. At rare times, a totally unexpected geopolitical or financial event takes place and we are jolted. We fall flat on our face, and society and our lives unravel.
To cope with all the randomness, we are always forecasting and then fine-tuning our expectations as we go. We try to find the counter-intuitive. We take measures that will minimize risk under worst-case scenarios.
Nassim Nicholas Taleb, a finance professor and stock market trader, popularized the term “Black Swan” to refer to an event that occurs contrary to what is normally expected, a deviation that is difficult to foresee or predict. The metaphor of the black swan is derived from the common belief that all swans throughout history have been white, hence it is reasonable to conclude that there are no black swans. No one expects to see a black swan.
As we step into 2016, analysts are trying their best to foresee the unforeseeable. The result of these efforts have been Black Swans that are, unfortunately, biased towards the downside.
Here are some of the Black Swans of 2016 and onward:
A Brexit has analysts arriving at opposing forecasts. Some say that the costs of EU membership, once removed, would lead to a better economy for Britain. Others assert that an exit would result in weaker trade and foreign investments, resulting in a decline in the country’s GDP. At present, it is hard to quantify the effects of a Brexit. But it seems reasonable to expect that the remaining EU nations will not appreciate the British decision to leave them and will likely lead to the UK playing a less significant role in geopolitics and economic policy setting.
United States monetary stimulus losing efficacy in bolstering the economy.
Interest rates can only go so low and China can only allow the United States to monetize its debts to a certain extent
before it becomes absolutely unfeasible. Once this point is reached, it is speculated that economic policy makers may possibly revert to fiscal spending as a means of stimulating the United States economy.
The EU getting more involved in the war against terrorism.
More than just a reaction to the recent terrorist attacks on European soil, engaging in war, as an outlet for fiscal spending, also serves to stimulate the EU economies, particularly that of Germany’s. With the US taking a more isolationist foreign policy, EU nations are now left to fend for themselves against the terrorist threat.
A debt market crisis.
As the United States public debt, now standing at $18.8 trillion, looms and keeps growing every day, the threat of a debt market crisis becomes more and more impending. A sovereign debt default is destined to send stock markets reeling across the globe much worse than they did during the housing crisis in 2008. The ghastlier question now is: who will bail the market out this time if it’s already the United States government defaulting on its debt?
A financial crash magnified via the shadow banking sector.
The International Monetary Fund (IMF), in its October 2015 Global Financial Stability Report, stated that it is expect
ing a financial crash to come in a matter of time. However, the ramifications of a United States default, for instance, have become especially hard to quantify due to the recent growth in the shadow banking sector. The bouts of quantitative easing have flushed the global market with fresh funds. Regulators have tried to implement more stringent policies to rein in market players awash with cash. In response, however, a lot of that money has been diverted into the shadow banking sector. International Monetary Fund Managing Director Christine Lagarde cited shadow banking as the greatest threat to the global economy at present. As shadow banks operate beyond the purview of regulators, the extent of their operations and their impact remains beyond even the IMF’s estimation.