STAFF NEWS & ANALYSIS
Shooting the Black Swan
By Staff News & Analysis - March 04, 2013

The black swan sequester … Since the housing market imploded six years ago, we've been suffering from black swan fever. When Nicholas Taleb penned his passionate polemic about the inability of financial markets to allow for unanticipated and rare events ("black swans"), he did us all a great service in highlighting the narrow-mindedness that can have dire consequences. Then the pendulum swung too far. Instead of complacency about rare, destabilizing events, the markets, the media and the politicians developed a fixation: Find the next black swan. That has led to a belief that any sign of stability, any indication that the worst may have passed is simply a false dawn. Luckily, that skittishness has passed. – Reuters

Dominant Social Theme: The Black Swan has flown. Its glory is gone.

Free-Market Analysis: Black Swan. Being Austrian, we never believed in it to begin with. There are business cycles, triggered by excessive money printing – and these cycles predictably trigger black swan events.

Which means, really, there are no black swans.

The black swan was a kind of dominant social theme. The mainstream media loves to write about them because, being unanticipated, they offer a great excuse to avoid an analysis of the business cycle. Much easier to mouth the words "black swan" than to explain Misesian business-cycle theory. And not only easier but better, from the mainstream standpoint.

Money power is a good deal more comfortable with a black swan explanation than a business cycle one. But even black swans lose their luster after a point. And perhaps, if this Reuters editorial provides us with a clue, black swans themselves have reached their end-use date.

Too much talk about black swans can have a depressive effect on the so-called animal spirits that Keynesians count on to get the economy moving. The teeny, tiny progression of the US economy (noticeable to some but not to us) could be derailed by so much talk about black swans.

And so that talk should be banished. Here's more from the article (paragraphing ours):

Yes, financial markets have been in a holding pattern of late. But if what is happening now had happened in the past few years, the markets would have been roiling. Flat markets now are a good sign. This week alone, Italy's elections did not go as many outside of Italy would have hoped, but the markets shrugged. Instead of ushering in a center-left coalition committed to austerity and labor market reform, there was an indecisive result whose main winner was a professional comic whose message is throw-the-bums-out.

Later in the week, the official Italian unemployment figure was announced as close to 12 percent and economic activity contracted more than expected. With the week bookended by renewed concerns about the eurozone and the sequester, you would have thought markets would easily slip into a panic that has been all too familiar of late. They have not.

In fact, during the past three years of rolling crises, equities and bonds have been on a quiet tear. Since May of 2010, the S&P 500 is up nearly 40 percent, and there has been a boom market in bonds as yields have fallen globally. That has not helped people who put their retirement income in government bonds or money markets, at least not directly, but it still demonstrates the disconnect between the climate of fear that has suffused our economy and political life and the relatively stable bull market that has been chugging along at the same time.

You see? Markets have been on a tear despite the "climate of fear that has suffused" them. And so, we are told … forget about black swans. Sure, the article tells us, markets are often mistrusted but sometimes a banana is just a banana; maybe today's markets are "strong" because they are, well … strong.

Of course, we tend to think markets have doubled in the past five years because central banks have pumped some US$50 trillion into the larger marketplace (most of which is still stuck in bank coffers).

But the Reuters article is out ahead of us, explaining this is yet one more "dismissal" of market strength. "[Markets are seen as] artificially and hence temporarily inflated by central banks around the world pumping easy money … [This] reflect[s] both long-standing and sometimes justified anger at the way financial markets have imperiled global prosperity repeatedly over the past century." You think?

Wait. There is this: "They also reflect a black swan culture that has rejected any metric that doesn't reflect crisis, and thankfully, that culture appears to be waning. Each new crisis in the last few years – Greece will leave the eurozone; China will implode; the U.S. will default; debt will destroy us – has fueled panic. But the whole point of black swans was that they are rare and unforeseen, not that they are common, frequent and easy to identify."

Hmm … The black swan meme provided the mainstream media with a way to avoid discussing the reality of the business cycle and the inevitability of economic crashes. Now that a "recovery" is underway perhaps the powers-that-be worry too much discussion of upcoming black swan events can distract people from the good news that the top elites want them to focus on.

So enough of all this gloomy talk! As the article tells us, "the end of crisis culture doesn't mean we should cease being vigilant about risks, but it is a needed and healthy shift. Crisis and panic are not optimal states for addressing problems, which may be why Washington remains incapable of actually addressing problems."

More positive thinking: "The dynamism that abounds – whether in Silicon Valley or São Paolo, whether in Hong Kong or Austin – is one reason so many companies have been faring so well, and in part why financial markets have been quietly booming." Again, US$50 trillion had little or nothing to do with it. We've been a bunch of whiners when we should have been investors.

Prosperity – real prosperity – is around the corner. Perhaps, as Bill Clinton once famously said, Western economies have figured out how to banish the business cycle. Perhaps ….

After Thoughts

Laissez les bons temps rouler …

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