In December 2014, then-President Barack Obama warned that the United States needed to prepare for an upcoming pandemic. This came a soon after the Ebola outbreak had threatened to spread worldwide. People knew of pandemics and their impact from history but Covid-19 took a lot of us by surprise. This can be seen as a ‘Black Swan’ event – an event or discovery whose existence was not predictable from the available data, and whose effect on society or the markets yields surprising and unexpected results. Just because all the data says that there are only white swans does not prove that Black Swans do not exist. Philosophers debated that they didn’t exist until explorers found a Black Swan in Australia. It was quite ironic that yesterday, whilst holidaying in Queenstown (South Island NZ), I saw a Black Swan – see photo. It immediately reminded me of Nassim Nicholas Taleb book ‘The Black Swan’ (2007). The book describes a black swan as a highly improbable event with three principal characteristics:
- its unpredictability;
- its massive impact; and
- after it has happened, our desire to make appear less random and more predictable than it was.
The GFC unquestionably meet the criteria as a Black Swan. No one saw it coming and no one knows how it is going to end. The same can be said about Covid-19. This unexpected and hard-to-predict event was not within the range of normal expectations. However it will result in a major economic contraction on a global basis.
Economist Hyman Minsky once wrote a thesis about economic stability – more applicable to the GFC Black Swan event.
“If you have a wonderful, stable world and, better yet, it is growing nicely and nothing is going wrong, you are likely as the years go by to take more risk. As time passes the cost of taking risk gets less and less because interest rates come down. You can imagine that people will get carried away into thinking such conditions are permanent and take on record levels of debt. They think conditions will always be good. And then all it takes is one small event to create instability.”