The holiday spirit lingers. With all due respect to the Twelve Days of Christmas, let’s see if we can predict seven potential black swan events for 2010. But we have a conundrum. According to Nassim Taleb (author: The Black Swan: The Impact of the Highly Improbable), “black swan events” are high-impact, hard-to-predict and rare events that are beyond the realm of normal expectations, that is, statistical outliers. Thus, if we are able to predict them, they may not be true “black swan events.”
I will leave that issue for philosophers. Let’s focus on possible “disturbances in the Force” which can render useless the carefully orchestrated Obama, Geithner, Bernanke engineered recovery.
Black Swan Event Gestation
The government and mainstream media have been extremely helpful in identifying “black swan events.” These even have usually been hidden in plain sight and then reported by main stream media. Then we have a noted academician or high government official contextualizing the event to make the public believe that the occurrence of the event is improbable or lunacy. Examples: Ben Bernanke reassures the public that sub-prime losses were well contained and no threat to the economy. Tim Geithner proclaims that the largest banks were well capitalized.
In the former Soviet Union the joke was that nothing was true until it was officially denied.
2010 Candidates for Black Swan Event of the Year
And now for an Academy Award moment, the nominees please:
- The Dubai World default – We are again receiving governmental reassurance that the Dubai World is well contained. Hearing this has eerie echoes of the sub-prime crisis being well contained. Why? We live in a highly interdependent worldwide financial system: if a butterfly flaps its wings in Beijing… you know the rest.
- The US defaults on its sovereign debt – The Obama administration provided financial guarantees to everyone from American Express to GE to money market funds to Citicorp. More than 2 trillion dollars of new US Treasury debt will need to be financed in 2010. Is there enough money in the world to fund these deficits? What if a Treasury auction fails; that is, there are not enough bids to cover the amount offered? That is like having a garage sale and nobody coming by.
- The FDIC runs out of money – One commentator believes that the FDIC ran out of money in October 2009. The FDIC is trying to muddle through by not aggressively closing problem banks. Yes, the Treasury could step in and loan the FDIC money, but review the second bullet above on the potential for sovereign debt default. Also, modern day bank runs occur via the internet rather than through heartwarming scenes a la It’s a Wonderful Life. There is no George Bailey and no honeymoon money to bail out the money center banks.
- Commercial real estate implosion – Commercial real estate – office buildings, hotels, regional and strip malls and multi- family dwellings have had a price decline of 41% since 2007. Rents have declined in all categories. Commercial real estate heavily utilizes short-term financing which require frequent re-financing at three, five and seven year intervals. Re-financing needs will double from 2009 to 2010. Already stressed regional banks financed much of the growth in commercial real estate. Next year could be the perfect storm as both public and private sectors tap a limited pool of capital.
- State, county or municipal insolvency – Multiple states are nearly insolvent. The same problems exist at the county and city levels. States cannot declare bankruptcy, but counties and municipalities can. A cascade of these bankruptcies would tax state treasuries. A series of state defaults would put pressure on the Federal government for another set of bailouts. Municipal defaults would send shockwaves through all financial markets.
- Pension Fund Failure – Public and private pension funds are massively underfunded. See Underfunded Pension Plans: The Next Shoe to Drop. Next year could be the year of recognition. PBGC has limited resources to bailout the private sector funds and there is no PBGC coverage for public pension funds. Multiple pension fund failures loom on the horizon.
- War in the Middle East – Iran has shown contempt for international efforts to stop its nuclear development program. Israel or the United States may be forced to take military action. Iran has threatened to retaliate by closing the Straits of Hormuz, the international oil shipment passage way for Gulf oil. Oil prices could soar crippling the world economy.
The Sky is Clouded with Black Swans
Given the nature of black swan events, I cannot predict that any will land. It is even more difficult to determine whether or not they are even black swan events at all. Other worthy candidates: dollar collapse, earthquakes and volcanoes, sovereign debt default in Portugal, Spain, Italy, Ireland, Greece, the United Kingdom (or all these countries), Euro collapse, depression in China, constitutional crisis in the United States. The list is long and fraught with possibility. Or the black swan event could be that nothing happens at all.
Still hope spring eternal, keep checking the skies and Happy New Year.
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