It all started happening last week, and for no obvious reason. Investors and lenders suddenly stood up and said, “No mas!” About US$1.8 trillion disappeared in a few days as the US market had its worst week in five years.
Are there any “positive black swans” in a market like this? “We should have more respect for businesses that are prone to positive black swans, like biotechnology, big pharma, technology, and exploration stocks,” Nassim Taleb said last week in Vancouver, where we were taking notes at the Agora Wealth Symposium.
“Instead we respect bankers. Banks were businesses made for dull people who talk slowly and don’t seem very bright…but it’s the riskiest business you could think of because it’s prone to big explosions.” Taleb may be on to something here.
What is a positive black swan? It’s a business where the losses are regular, but the winners are of enormous magnitude. Oil, gas and mineral exploration certainly qualify. And so do alternative energy stocks. If you view a spread of companies in the resource and alternative energy sectors as a portfolio of potentially positive black swans, then you get what we’re up to in our two Aussie-based letters, Outstanding Investments and the Australian Small Cap Investigator.
The largely North American crowd was definitely interested in Australia. Of course, we may have had a little to do with that. “Think of the global economy as a couple of trains running on parallel tracks. On the one track is the locomotive driven by the American consumer, dressed in his Nikes made in Vietnam, furiously slurping down Coke and fries and 3,000 calories a day while he swipes his credit card at the nearest passing retailer.”
“This freight train—which runs on oil and credit—is running at full speed. But its operator and passengers are increasingly alarmed at the clackety-clack sounds and the volatile vibrations coming from the engine room. Investors along for the ride are beginning to wonder if this little engine that could still can, what with a collapsing housing market and a credit crunch.
“Parallel to the American railroad is the Chinese steam engine. It’s chugging alongside at full speed too, running on coal from Australian suppliers. The Chinese train is full of food service cars and merchandise cars for the American train. But it’s clearly on its own track, with Chinese customers and investors less and less concerned with the growth in American profit margins and waistlines.”
To make a long story short, we suggested that though the world economy will be buffeted by an American financial train wreck, China’s growth will ultimately be driven from within, by its own people consuming its own products. Australia has hitched its ride to China in this century. And to the extent that Australia is a China proxy for Western investors, we suspect the local share market will fall less and recover more quickly than the Dow.
Markets and Money