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Black Swans become the norm, not the exception

Black Swans become the norm, not the exception
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First Published: Wed, Sep 17 2008. 11 05 PM IST

Updated: Wed, Sep 17 2008. 11 05 PM IST
The cottage industry that Nassim Taleb created with his book The Black Swan: The Impact of the Highly Improbable has gone beyond global. The options-trader-turned-author is concerned with rare, major events that humans argue were predictable in hindsight. It’s a kind of philosophical Murphy’s Law for investors, and one increasingly hears folks from New York to Ulaanbaatar buzzing about black-swan events.
Taleb’s 2007 book, named after a bird once thought not to exist, was itself a black swan—an unexpected hit with great impact. It ranks much higher on Amazon.com’s sales charts than Alan Greenspan’s 2007 memoirs, The Age of Turbulence. That, too, gets into black-swan territory.
Who would have expected a year ago that Taleb would be outselling the man dubbed “Maestro” in a gushing 2000 book by Bob Woodward?
Taleb’s insight that we are all blind to rare events and fool ourselves into thinking we can predict risks and rewards proved more prescient.
Former Federal Reserve chairman Greenspan helped fuel the bubbles and set the weak regulatory stage for the US financial crisis. Taleb shed light on why few saw it coming. It gets you wondering what other unexpected, high-impact events are ahead.
Japan’s lead
Who would have predicted the great Bear Stearns and Companies Inc. would collapse? Or that Lehman Brothers Holdings Inc., founded in 1850, would be next?
Or that the Fed would follow Japan’s lead and shore up a cracking system with ultra-low interest rates? Or that the US financial crisis—featuring zombies such as Fannie Mae and Freddie Mac—might be worse than Japan’s?
Who would have thought five years ago that Russia would be calling the shots in 2008? Or that the wealth of Singapore, population 4.7 million, would be integral to keeping the $14 trillion US economy afloat?
Would you have believed North Korea experts would be wondering if the son who got caught trying to visit Tokyo Disneyland with a forged Dominican Republic passport might replace Kim Jong Il? Or that South Korea would turn the tables on Wall Street with Lehman going hat-in-hand to Korea Development Bank for capital?
Perhaps the most disorienting change in the global order is the shift in power from the West to the East.
Black-swan enthusiasts will point out that some of the above examples don’t exactly fit Taleb’s definition. Yet the power shift to Asia and West Asia is occurring faster than seemed possible. It has markets considering how countries could use the phenomenon to their advantage. So what do newly rich, often autocratic countries want and how can they get it?
Just think how surprised we’ll all be when the United Arab Emirates (UAE), awash with petrodollars, undertakes an emergency takeover of Citigroup Inc., Morgan Stanley and Washington Mutual Inc. Think of how New Yorkers will react when UAE officials announce plans to move Wall Street to a man-made island in the Persian Gulf.
Julian Barnes laid out the plan in his 1998 novel England, England. It chronicled the creation of a UK-themed amusement park that Britons and tourists like better than the country itself. Given the US’ crumbling airports, bridges and dodgy broadband speeds, financiers may like the new Wall Street more than the old one.
What else haven’t we thought of? Perhaps China will agree to increase purchases of US treasury bonds and not dump US agency debt in exchange for Taiwan. Maybe China wants to buy Australia, where the stock market is about 30% cheaper this year. Russian tourists love visiting London. Oil-rich Russia may want to buy the city, and with the housing slump, it may get it on the cheap. Perhaps West Asia will seek to buy every football team in the English Premier League.
Or after Singapore’s sovereign wealth fund owns a piece of all major banks, it might be able to get them to shut their Hong Kong operations and relocate to new office buildings in the island-nation’s own central business district.
Yes, this all sounds nuts, kind of like a woman running for prime minister in male-dominated Japan, as Yuriko Koike is. It sounds crazy, like China controlling the weather at the Olympics, or some scientists fearing an experiment at a laboratory near Geneva would destroy our planet.
White is black
Pure lunacy—like a politician twice accused of sodomy being on the verge of leading Muslim-majority Malaysia. Or Japanese and American voters thinking old-school politicians Taro Aso, 67, and John McCain, 72, are the agents of change that their sputtering economies need.
I’m getting fanciful here for a reason. The rhythm of this column moves from the serious to the seemingly absurd because that’s what has become of global markets.
Lots of bright people tried to call the bottom in markets. The normal goalposts of analysis and financial models have proven useless. The more certainty with which so-called experts tell you what will happen, the faster you should run in the other direction.
These days, up really does seem to be down and white really does seem to be black, at least where swans and prognosticators’ eyes are concerned.
Bloomberg
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First Published: Wed, Sep 17 2008. 11 05 PM IST