The Black Swans are in flight
by Ross Greenwood
A “black swan” event is one that you don’t expect but one that you should account for.
In finance, it broadly means something that nobody could have reasonably foreshadowed, but which has a dramatic impact on world economies and stock markets.
COVID-19 is the classic black swan. Nobody could have, in all reasonableness, expected for and budgeted for a global pandemic that would lock up communities and prompt global Governments to borrow and print trillions of dollars to keep their economies afloat.
Who could have expected, or planned, for 440 million confirmed cases and almost 6 million deaths?
Just as who could have expected, or planned for Russia’s invasion of Ukraine? This is the same Russia that, until it invaded Crimea in 2014 was a member of the G8 – the meeting place for the most powerful Governments on earth. Until then, Russia craved a place in the wider world. But because of the invasion of Ukraine, who could have planned for oil prices to go above $120 US a barrel (when they were $20US a barrel in 2020, after Covid broke out) or that energy coal prices would rise from $US50 to $US430 a tonne (when much of the world thinks this form of coal is worthless and that mines should be closed because of their greenhouse gas emissions)?
These are black swans, and they can disrupt important parts of your life: your job (income) your savings and your retirement. In the case of the poor Ukrainian people, this latest black swan is threatening their lives and their homes.
So, while war, natural disaster and mass illness cannot be foreshadowed with any certainty … history tells us there is always a chance of such a thing happening.
The black swan event of 2007-08 was the housing crisis in the US that resulted in the Global Financial Crisis. In truth, this event was foreshadowed – not just by the hedge fund managers famously So it’s not like anybody can’t see these events not just by the not just by the hedge fund managers famously depicted in the movie, The Big Short, where they basically worked out how to make money if the housing market collapsed. But the truth is that many people even before them, understood that there were risks in lending money to people who, in even the slightest of circumstances, couldn’t afford to pay it back.
The same thing is true now. There are black swans literally everywhere: rising oil prices; even interest rates being as low as they are, if they start to rise and people have taken out mortgages they can’t afford, well, you know that things go wrong.
These too, are potential black swans.
But it’s not just the fact that there could be a black swan event that’s the problem: it’s the timing of it.
The reality is that oil prices might very well go back to where they were if something is resolved in Russia and Ukraine. Interest rates could stay lower for longer, though not likely.
Eventually, it’s the pressure of circumstances and are easily visible that creates the black swan event, and not necessarily that it comes from nowhere.
I mean, it’s not quite like aliens suddenly turned up on earth. Now, that would be a genuine black swan event.
In most cases, the Black Swans are there to be seen. So really you should be able to anticipate it. And this is the reason why people should construct their portfolios so they can manage events that go outside their normal expectations.
What I mean by this is always have a little gold in your portfolio (through gold shares or ETFs). Always have some energy in your portfolio. Always have some food in your portfolio. Have a solid property investment. Think of the things that you might need if there was a black swan event that disrupted your life and community.
Now, let’s not to be doomsday about this … to imagine a war break could out here.
But even Ukraine, which had Russia across its border and its invasion of 2014 … could barely have imagined two years ago that it would invade the country and start bombing civilians.
The one thing to remember is that most things economic are connected. The situation in Ukraine has caused commodity prices and oil to go up which puts pressures on inflation and interest rates to rise.
That’s why black swans, though thoroughly unexpected, are quite often a living in plain sight.
And there’s a person who plays on a golf course that has black swans as residents on a regular basis, I can tell you that I walk past them and admire them. In other words, they are in plain sight.
Maybe not in North America or in Europe where the swans are white, but certainly here in Australia, where we should truly expect black swans – and plan for them.
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