Say ‘Hell No’ to a Black Swan Free World
According to Nassim Nicholas Taleb, a Black Swan “is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.” Black Swans come in two varieties: there are the good, and there are the bad.
These days, everyone seems to be all doom and gloom. Robert Prechter was featured in the New York Times this weekend all but declaring the end of the world and CNBC has been rolling out the pontificators one after the other proclaiming their own vision as to why we as a country are totally screwed. Black Swan Armageddons are highlighted and predicted (predicted despite the fact that the essence of the Black Swan is to be unpredictable) in just about every nook and cranny of the Internet these days.
Fear is sexy and fear sells. Maybe that’s why no one out there is discussing the potential for something to go terribly right in the future.
With that being said, I want to go out on a limb and take my stab at predicting three Black Swans of the positive variety, each of which I believe to be within the realm of possible outcomes, each of which I believe to be transformative positive catalysts that would drastically alter our “path to Armageddon,” each of which I believe markets are completely discounting from possibly happening.
1. China spends their massive horde of dollar reserves and unleashes quantitative easing 2.0 in a BIG way:
Yes, yes, I know the rebalanced Yuan rally was faded aggressively in the market just last week, but here I am thinking longer in time and larger in scope. Reserves are just what you would think they are–reserves (pardon the redundancy). They are a suppressed form of present demand in an effort to save for a time of need (or of no longer needing).
As of the latest numbers, China holds approximately $2.4 trillion in US dollar reserves. The release of these $2.4 trillion into global aggregate demand would do wonders. We all saw what aggressive monetary policy did in the US, taking us from the “abyss” back to a “new normal.” The spending of these China reserves could take us to a “new” new normal. Hank Paulson’s Bazooka and Ben Barnenke’s helicopter pale in comparison to the Chinese equivalent of “Shock and Awe.”
2. Medical costs, rather than rise sharply over the next two decades decrease in rate of change and even begin shrinking:
Sure we all know the Boomers are getting older and medical costs are rising sharply. This we know. What we don’t know is the power of innovation that lies ahead. Health care costs have been rising uncontrollably for nearly a generation now. It’s only natural to think that the trend would continue in perpetuity. But, the optimist in me sees three wild cards here that no one is counting on:
- The quality and cost of diagnostic testing improves drastically in both quality and price. PWC cited rising diagnostic costs as one of the most significant factors in accelerating health care expenses nationally. Improvement in this area will make a major difference in the cost of health care. It’s already starting to happen, with genome-based testing dropping drastically, while offering tangible improvements in quality of care. The improvements aren’t just limited to the genome domain. We are learning better each year which kinds of diagnostic tests are worth the cost and which ones generate tangible improvements in treatment.
- Innovative treatments hitting the market now are very expensive, but as the technology matures these prices will certainly come down. Moreover, newer and better treatments will continue to improve the way we treat some very troubling illnesses. Just yesterday, we got some GREAT news on the quest to find a vaccine/cure for HIV. Don’t underestimate the power of invention.
- And here’s the kicker. All these smart people who were steered to finance through their schooling will now find medicine a much more appealing option. The days of runway bonuses on Wall Street, while not over, are now looking smaller in the rear view mirror. It’s only a matter of time before some of the public disgust towards finance post-bubble turns into a fundamental shift into other areas.
3. The financial crisis triggers transformative productivity gains that increase efficiency and streamline innovation.
Companies and people had gotten complacent and lazy leading up to the 2007 bust. Since then however, the financial crisis has greatly accelerated the advancement of the Internet as an efficiency enhancer for countless enterprises and people, while simultaneously fueling a wave of innovation that in many respects exceeds that of the dot.com bubble days.
The financial crisis was the shock that bureaucratic and sluggish institutions needed to trim the fat in order to figure out how to more efficiently put their capital to work. Companies have invested heavily in cloud computing and virtualization, an area in which efficiency and productivity are greatly enhanced, while also providing for lower expenses and more cost-certainty over the long run. These changes will pay huge dividends over the long run.
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