Thursday, August 30, 2012

Black Swans


As the summer months in the northern hemisphere wrap up and political leaders return from their vacation, there is a sense of unspoken fear on what is to come as the majority of the world’s engine transitions into a testing and challenging fall. Puns aside, we’ve seen a relatively quiet August that did not give way to unforeseen impactful events of adverse proportions.
Halfway around the world and down under is a spread of slightly different emotional landscape. The coldest of winter is behind us but having an encouraging outlook ahead as we move into spring remains an ominous question of reflective perseverance. Perhaps the black swans floating across the Albert Park Lake offer some hints of what lies beyond the horizon.
Major political, economic and cultural shocks have often occurred in the months of August and September throughout history when most leaders have gone on vacation believing that world affairs would remain a silent and secret episode. The coining of fall and spring to signify the simultaneous and opposite phenomenon of this planet cannot be an innocent coincidence created to represent the transitional nature of our environment and the transformational state of our emotions.
Consider World War I’s eruption in 1914, the Nazi-Soviet pact in 1939, the Berlin Wall inception in 1961, the Nixon shock in 1971, the Black Wednesday event in 1992, the 9/11 attacks in 2001, and the US subprime mortgage crisis in 2007. Many of these shocks constituted events that were previously considered unthinkable, never on the radar screen. Such occurrences have been called black swans, events of inconceivably small probability.
I personally do not believe in the concept of black swans. Humanity’s history is rich and long, filled with countless events. If one were to observe closely enough, patterns could be derived from the study of history. In my humble opinion, black swans were coined by those whose frame of reference was limited by time and location, hence the events were considered virtually impossible. A student of history will argue that black swans can be predicted if one were to expand his or her frame of reference into different timelines and countries.
When you consider the scientific origin of the black swan, it was spawned from the belief that all swans are white. This was before the discovery of black swans in Australia by Europeans in 1697. Despite this known fact, a typical Frenchman or Englishman from the 19th century would have concluded that all swans are white during that period.
Before the 9/11 attacks, no one would ever conceive in their mind that terrorists will try to blow up American office buildings, certainly not a building like the World Trade Centre twin towers. Experts at that time tried to warn those in power but the warnings were left unheeded. After all, “it never happened before”. But those in power at that time did not know that terrorists have done so in other countries and in other decades past.
Until 2006, the Americans believed that their housing prices would never fall even if it slowed down because it had not happened before within living memory in the US. Thus, the public mass played out their predicted economic behaviour based on this assumption. If only they had realised then that housing prices had often fallen in other countries, even in the US before the 1940s.
Following the US subprime crisis into 2008, supposed black swan events begin to increase in frequency. The economists’ perception that big banks are “too big to fail” proved fundamental and enlightening – the Lehman Brothers. Enough said. Just a year later in 2009, the start of the Greek government-debt crisis laid the foundations leading to the European sovereign-debt crisis, effectively debunking the parable that “governments of advanced countries do not default”. Need I say more?
Having revisited all of the black swans above, is it really farfetched to say that a Eurozone breakup is now a very likely possibility? I still recall that economists considered this likelihood unthinkable many months ago but its probability is now placed well above 50% by experts.
The current political dysfunction in the US is another major indicator of events to come. Having lost its AAA sovereign rating from Standard & Poor’s in 2011, the fiscal cliff is now set for the 1st of January, 2013. Economists and investors alike are holding their breaths, hoping and believing that politicians will find a last-minute way to avoid the fiscal cliff again via quantitative easing.
Adding the November US presidential election into the mix, it is a recipe for a big shock. The way things are looking there, the presidential campaigns are not giving Americans enough cause to rally unto the Obama administration, and giving the American people every cause to be sceptical of Romney’s. Whichever way the result goes, it will bear a much clearer indicator once it is over.
The black swan in this scenario could be a repeat of the disputed 2000 presidential election between Bush and Al Gore. Following that fiasco, there were numerous talks of election reforms to ensure that the Americans’ votes will be counted or that a disputed result will not be resolved by political appointees. That reform has not taken place until today – a potential future reagent for global political instability.
Another potential black swan on the list that cannot be discounted is the threat of a terrorist attack with weapons of mass destruction, or have we all forgotten about it? Although very low in probability, we cannot overlook this possibility by limiting ourselves to the frame of reference made between counter-intelligence’s expert perception on the likelihood of a nuclear event and what is perceived by the public. With Iran and North Korea’s nuclear policy still left unchecked, unsanctioned and unregulated, much is still left to be desired. And much more is expected from the world community for action that will lead to an inevitable resolution – a potential future conflict.
Finally, I’d like to bring up a point on the occurrences of natural disasters. These are common and not new but the idea of a climate disaster is unprecedented. Is the current hurricane-turned-tropical-storm Isaac in the US another omen of things to come? We would all be remiss if we have not spotted the tell-tale signs of the world in the last decade – a potential future world extinction event.
Just remember this: the moment we trap ourselves by thinking that a finite cache of natural resources must imply their logical eventual exhaustion – without considering mankind’s economic progress and underestimating the benefits of our technological advancements – we consign ourselves to the mistake that a true climate disaster cannot happen because one has not yet occur.
Viva la vida!

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