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The first quarter of 2011 has come to a close. And while it was good for the stock market, it wasn’t good for the world. In fact it came with an unimaginable cocktail of economic shocks.
First it was floods in Australia. Then it was an earthquake in New Zealand … social uprising in the Middle East and North Africa … an intensifying debt crisis in Europe … and then the toxic combination of a record earthquake, a massive tsunami and an ongoing nuclear fallout in the third largest economy in the world.
Economist Nassim Taleb defines an event that is high-impact, hard to predict, rare and beyond the realm of normal expectations in history, science, finance and technology as a “Black Swan.”
We haven’t just seen the rare black swan, we’ve seen a flock of them!
In financial markets these events are coined “tail-events” that have an extremely low probability of occurring.
When Wall Street-ers are projecting how great the economy and stock market will be going forward or how much risk is on the table at their company or bank, they make a gratuitous allocation to account for these “tail risks.”
And as you might expect, the modeled impact of a shock event never projects a debilitating scenario for a company, much less something systemically threatening.
But as we’ve seen, those models don’t work. They don’t do well at predicting crises, nor do they do well at measuring the ultimate fallout. Moreover, the rare events that are said to be precisely “accounted for” tend to show up with greater frequency in crisis environments. And they tend to be very destructive.
In normal times, any of the recent events would be deemed magnificent in isolation, much less in clusters — like we’ve just seen. But these are hardly normal times! This cluster of global shocks occurred in the midst of a feeble recovery that is following the worst global economic crisis on record.
Meanwhile, the markets have time and time again, shrugged off the unimaginable. And because markets have seemingly shrugged it off, government officials and policymakers have too. They’ve been emboldened … going right back to the business of forecasting robust recoveries, telegraphing rate hikes, removing fiscal stimulus and talking up the outlook.
Similarities to 2007-2008
What we’re witnessing today should give pause to anyone who simply looks back to the events that unfolded in 2007 and 2008. Because the punches then were coming fast and furious too, and with a scale that no one had a reference point for.
Yet like now, the markets back then seemingly shrugged it all off! Investors kept building more and more risk. And public leadership showed the same sense of denial and arrogance, until the wheels came off.
Much like 2008, despite all of the growth-damaging evidence, policymakers in Europe are ready to pull the trigger on rate hikes. This time, the Bank of England might be next. And the U.S. Federal Reserve is telegraphing hawkish moves too, which my colleague Mike Larson wrote about yesterday.
Don’t forget, less than six months ago the fear of deflation was the big risk. Now, it’s inflation. But it’s not demand driven. It’s not because the average person has access to “easy” money.
Instead, it’s the combination of China’s commodity hoarding binge in 2009 and 2010 and the recent negative supply shocks in oil and food commodities. Nonetheless, it’s flipped the switch for central bankers.
But given the fragile nature of the global economy, combined with the added immeasurable impact from the events of the first quarter, a premature tightening from global policymakers could not only solidify another global economic downturn, but exacerbate it.
Some private sector economists are starting to see the writing on the wall …
Forecasting firm, Macroeconomic Advisors just revised its U.S. Q1 GDP estimate from 4 percent down to 2.3 percent — that’s huge! It appears Goldman Sachs will have a sharp revision coming down the pike. This week they warned of “significant downside risk” to their 3.5 percent growth estimate.
Meanwhile the Fed, ECB and BOE are still hanging on to the hope that they were able to bridge the gap between the worst economic crisis since the Great Depression and a robust economic recovery.
But history shows it’s not likely …
The most extensive study on historical debt crises suggests that the decade-long build-up in credit that fueled this global economic downturn will take at least a similar amount of time to unwind.
And we’re less than halfway through it.
Regards,
Bryan
{ 16 comments }
hi brian,
2 years ago a fed gov was seen on financial tv as saying fed interest rate tightening will not occur until at earliest 4th quarter 2011. i believe this may be true but the effect will cause shock to mkts and this tightening will be quickly reversed.
also, your bullish short and long term stance on the dollar index will prove to be wrong. already you can see that the buck has made no recovery short term as you predicted. it is not a save haven any longer. the dollars are pouring into oil, gold and silver instead. the new shock reaction flows have changed.
later
charlie
michigan
Black swans a fairly common in Australia and a black swan is that sate emblem of Western Australia
Dear Bryan,
i do not understand your position. Do you think the central banks should keep easy money flowing? In my opinion they should stop now and immediatly. Why, because the turmoils in north africa are a result of easy money in the US, Japan and Europe. You do not need to be arocket scientist to understand the connections between easy money and rising commoditiy prices. Yes, as a result of the tightening we will see a significant recession. But a recession is not the end of the world. It will give all of us the possibility to rebuild the economy on a solid base and not on a false credit bubble. To wrap it up. I agree 10000000000000% with the comments on tihis topic with Mr. Vogt.
Black swan events???–only few fit the criteria. Japan has 1500 earthquakes per year, numerous tsunami warning and an occasional wave. It was a matter of time. The japan nuke industry has has many accidents over the years that have been whitewashed by the government/industry/ media ruling cabal. 50 year old technology was an accident waiting to happen.
The social/political upheavals in middle east are more food price and inflation related than desire for freedom. Empty bellies create a angry population. When you are raised on credit heroin, any decline in supply will cause a predictable reaction.
Excellent article !!
As readers will mostly realise economists seek out recognisable economic patterns, when they don’t find one that fits they attribute it to a statistic residing in the long-tail, they point out that it can’t be understood (the WHY question) systemically. Perhaps they are looking in the wrong place for a recognisable pattern that will help them and us understand when a system is becoming systemically less viable and subject to failure. It is interesting to note that in the UK the Bank of England’s Monetary Policy Committee is made up of economists who are trained as economists, to use the mathematics of economics, to use the causal patterns and thinking recognised in economics; they do not portray the capability to think about the nature of complex systems, nor understand what does and does not constitute a viable system. When they vote on interest rates the minutes indicate (subjectively) those for and those against changing rates; there is no picture presented that portrays the complex nature of the system; they seem to continue to believe in metaphor to Newtonian mechanics rather than acknowledging that our understanding of the world has changed, we now understand the nature of Relativity etc.
You can’t create an understandable picture of a complex system by using traditional economic models, they just don’t work (except as an example during linear growth ie a bull market); it requires a different mind set and one that our current economists seem to be lacking. We might ask why did the banks, to create new competitive value, start to hire mathematicians, physicists etc. who could understand (particularly at the micro level) the nature of the complexity and exploit it. Why then didn’t the economists spot, as just another example, that the use of such approaches required a different way of thinking as discovered earlier during LTCM’s downfall? It seems that the skills and competences for managing economic and financial complex systems is not an easily recognisable attribute at the moment. Yet Policy should be asking these questions and demanding to be given an understanding of the complex nature; yet they don’t themselves seem to recognise that they have to change their own way of thinking. As Einstein informed us: “without changing our pattern of thought we will not be able to see the problems we created with our current pattern of thought.â€
Dear Bryan,
I opened your Money and Markets Saturday commentary very reluctantly today because as usual, I thought: ha, this is Bryan Rich again! Today, however, I must admit I found your commentary the best I’ve read from you so far…… So I thought I must tell you why.
You see, I’m a European (in fact I’m Swiss) and live in Italy. Being semi-retired and having invested less successfully than more successfully (sorry!) for the last 25 years, I dedicated myself to taking care of my own finances since approx. March 2009. As such, I READ AND READ and educate myself at least 5 – 6 hours every day…. Of course, I have not become the finance specialist. However, as you may imagine, I have the possibility to compare a huge amount of comments, interviews, and written media practically all day long – if I wish so. And that, believe me, has been a big eye-opener for me.
Your comments to me always seem directed to problems and disasters outside the US while INSIDE your country there are enormous hurdles. I firmly believe they are at least as huge – if not more! – than any problems outside the US. Yet we always hear and read you speak about Europe, now Middle East, Japan, natural disasters, then perhaps slightly, but VERY VERY SLIGHTLY, touching on the US.
In Europe, just for one example, we don’t have 44 million people on food stamps. We all don’t have guns at home like the US because we don’t have all the fear that possesses the Americans! With all the guns people carry in the US, you could be sure to have a civil war real quick!
Admittedly, we have a HUGE MESS in Europe – but what you have in America – sorry to say – is FULL BLOWN DISASTER in my view….!!!! Is this why Americans tend to look outside their country for a scapegoat for the global crisis? It sure would not be a nice fashion of turning away your own miseries.
I admire you for being patriotic and, despite all the evidence, one of the biggest $-bulls I read. That’s ok with me. However (and I’ve been to the US quite a few times and also have long-time friends there), I envy nobody living there. Much to the contrary…..
In your position and being read by so many people, however, I reckon that a more objective analysis and a more globally neutral view on your part is necessary.
Thank you and keep up the good work!
God bless,
Marianne
This comment is directed to Marianne from Switzerland. And to you, Bryan.
I understand Marianne’s statement that you do seem to defend the Dollar against the other currencies in your articles or at least that is how they often read. I am not a scholar of the moves in currencies and believe you however you say what you do about them. Marianne, listen to Bryan’s video on Friday’s Weiss Research Newsletter. It was an excellent commentary on the whole global ecomonic issue and I think you will at least find assurance of Bryan’s ability to tackle what he does and I do believe he does it well! I would trust my money to him in a heartbeat if I could.
I understand how you view America and most of the people who live here but please understand we are also victims of elected officials and the ineptness of selfish, self-serving corporate men who are nothing but criminals of the highest kind. Europe is full of these people, too. Kind regards to you.
Bryan,
PS. I forgot to tell you why I thought today were the best comments I read so far from you: because just for once, you did NOT PROMOTE THE US-$!!!!
Brian, Thank you. and thanks to all the wise group and especially to Martin Weise. I think he carries honesty to it’s highest level. The things you all say are the things that I have known right along. And
Brian, I have a burning question which I would like the whole of you to address and answer.None of you seem to be afraid of this answer but I have listened for someone to address it didn’t happen.
This crisis that everyone talks about as 2007-2008 actually hapened ten years earlier. Now to get a
jump on a crisis it seems to me that TEN YEARS advance notice was really sufficent time to avert the crisis. Sometime in late1998 we hit a point where the world was devoid of money. Banks could not lend. bonds stopped selling. The market closed early. Then Greenspan pulled the rabbit out of the hat. He said start lending. They said we have no money. He said it does not matter. Start lending. They did and it was business as usual! Greenspan did the right thing at the moment. He averted the crisis for the moment which was spot on. He gave us time. Then, the thinking people of the nation did nothing. I am uneducated.
I did not even begin to learn the stock market until 6 mos. ago. I still havent made any money but I am with the right group. I see money ahead. But I knew of the 2007-8 crises ten years before hand. WHERE ARE OUR THINKING EDUCATED PEOPLE? TEN YEARS, TEN YEARS?!
Thanks for being there.
Roy V
Nowhere in this article could I find any mention of Bryan’s beloved dollar. Why is that. It was his optimistic staple for as long as I remember, through thick and thin, damn the torpedoes.
William
Great video! kudos for you on a good analysis regarding the speculation in oil and commodities and a fight toward safety.
A note on Martins new video. It may be a well founded warning…but out of place given the discussions by you and others that are more balanced.I think Martin is still recovering from the crash of 29″ said with love!! Martin…..you guys are doing a great job…keep informing the unwashed..like me
Great article, Bryan, but who exactly is the market? who exactly are the investors? The answer is simple – its jpm, GS, citi, BOA…etc etc etc. If THEY want the market to go down, market goes down. If THEY want the market to rise, market will rise. Fundamentals and technicals are all immaterial IMHO in current era of extreme manipulation. They wanted the markets to fall in 2008 – so that they can arm twist the gov for bailouts – they did it. Now they got all that they wanted – they are hand in glove with the gov to con every one to believe that “recession is over”.
Why are you constantly worried about the Euro? It is 143 % higher than the U$D.
Bryan:
Last Saturday, March 26, 2011, you wrote an Article entitled “Portugal is big warning flag for ALL investors”. You quote govt officials, the big three, who changed on a dime.
I would like to use your quote in another article, but need a reference.
Can you or anyone help?
hi Bryan
it is interesting
but as i have a lot to read
will it be possible to have an abstract & summery of articles
thanks