Fruitlessly Searching for Black Swan Events

Black swans…white swans…and big, nasty birds…

The weather is beautiful here in Paris. The sun is shining. People are returning to sidewalk cafes. Trees and flowers are beginning to bud out and bloom. Early spring in Paris can be delightful…or horrible. Be sure to pack a warm sweater and a coat…and hope you don’t need them.

Prepare for the worst; hope for the best. That is our unofficial motto, here at Markets and Money.

Dow plus 178 points yesterday. Oil over $100. The euro is rising (dollar falling). Gold is back at $1,426.

And Warren Buffett is the latest to get on board with our Trade of the Decade – or at least, half of it.

Warren likes the buy side. Buy Japan, he says. It’s cheap.

But watch out, Warren; the yen is not cheap. You could win on the stocks…and lose on the currency.

That’s why we covered both sides in our Trade. Buy Japanese stocks. Sell Japanese bonds. And be prepared to wait.

Warren’s recommendation is typically positive and upbeat. He thinks the worst is passed in Japan. He’s now hoping…and expecting…better times. Japan’s stocks are a good deal, he says. You get a lot for your money. Things will improve.

Our view is not exactly cynical, but we don’t think the disasters are finished in Japan. We prepare for the next one.

“What,” asked an astonished French colleague. “They’ve had the biggest earthquake ever…the biggest tsunami ever…and a nuclear disaster too? What else could happen…a giant meteor?”

Our friend Nicholas Taleb has added “black swan” to the vernacular. Lately, there are so many of them, we barely have time to recover from the excitement of one black swam before another one bites us on the derriere. There seems to be a whole flock of them.

A reporter recently asked a popular analyst “what black swans do you see on the horizon?” Markets and Money readers will recognize the absurdity right away. A black swan is something you can’t anticipate. It doesn’t present itself as a possible problem, on the horizon. You can’t see it. Instead, it comes out of the blue, a problem you didn’t imagine at all.

But now, the whole world is wasting its time looking in the bulrushes for more black swans.

They would do better to examine the feathers of those snow-white birds in front of us. They’re imposters. They’re frauds. They’re white swan impersonators. They’re really gray, nasty swans…with mean tempers and prone to sudden acts of violence…

What do we mean?

Well…glad you asked.

For one thing, there is QE2…swimming around…with a bright, new coat of white paint. Here’s the latest from Bloomberg:

Bernanke in Testimony Can Show Ron Paul How QE2 Works in Markets

The next time Federal Reserve Chairman Ben S. Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working:

The Standard & Poor’s 500 Index of stocks has climbed 18 percent since he said Aug. 27 that additional asset purchases might be warranted.

The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show.

Inflation expectations have jumped by 44.4 percent.

The unemployment rate has fallen to its lowest level in almost two years.

So much for 2008 Republican vice-presidential candidate Sarah Palin’s assertion that the “dangerous experiment” wouldn’t “magically fix economic problems.”

Maybe Bloomberg has its tongue in its cheek. Or maybe it really thinks QE2 is a great success. But the jump in inflation expectations is not necessarily a good thing.

Yes, stocks are up. And yes, so are junk bonds. You put in $100 billion per month; you have to expect something to happen. But what we see is an increase in speculation – and some bouncing around on the hard pan of a Great Correction. And yes, unemployment – as measured by the Labor Department – is down to its lowest level “in almost two years.” But 2009 was hardly a good year for jobs. And there are still 7 million fewer jobs today than there were before the Great Correction began in ’07.

No jobs; no income. No income; no shopping. No shopping; no real growth in the consumer economy.

The swan painters say Bernanke’s QE2 has boosted stock prices (right!)…and that higher stock prices increase Americans’ wealth (right again)…and that wealthier people will buy more, leading to real GDP growth (uh…not quite).

Relatively few people own stock portfolios. Those who do are aware that stocks go up and down. They’re buying stocks, but they aren’t necessarily convinced that this wealth is spendable; it hasn’t been around that long.

Meanwhile, far more people own houses than stocks. And houses are going down. Here’s the news from Reuters:

Sales of previously owned US homes fell unexpectedly sharply in February and prices touched their lowest level in nearly nine years, implying a housing market recovery was still a long off.

The National Association of Realtors said Monday sales fell 9.6 percent month over month to an annual rate of 4.88 million units, snapping three straight months of gains. The percentage decline was the largest since July.

The median home price dropped 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002.

“If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market,” said NAR chief economist Lawrence Yun.

Let’s see, nearly an entire decade of house price gains have been wiped out. Now one out of 7 houses in Nevada is empty! And next month begins the next big wave of resets, recasts, and foreclosures.

Is QE2 a happy, nice, white swan? Could it have a black heart? Maybe this swan is harmless, but we wouldn’t get too close.

We’ll return to this tomorrow…and to Japan, which faces a Godzilla bird of its own…

And back to our thoughts…

How do you like those generals? You pay their salaries. You train them. You give them perks. You salute them.

And then, when the going gets rough…the generals get going – to the other side!

The traitors in Yemen said they were going over to the rebels; that’s today’s headline story.

You dig into these stories and you find the typical explanations. The young are unemployed…over-educated…restless…’disenchanted.’

But what about the US? What is amazing is that our youth are not in the streets. What have they got to be enchanted about? Here’s The New York Times with more on the story:

WE all enjoy speculating about which Arab regime will be toppled next, but maybe we should be looking closer to home. High unemployment? Check. Out-of-touch elites? Check. Frustrated young people? As a 24- year-old American, I can testify that this rich democracy has plenty of those too.

About one-fourth of Egyptian workers under 25 are unemployed, a statistic that is often cited as a reason for the revolution there. In the United States, the Bureau of Labor Statistics reported in January an official unemployment rate of 21 percent for workers ages 16 to 24.

My generation was taught that all we needed to succeed was an education and hard work. Tell that to my friend from high school who studied Chinese and international relations at a top-tier college. He had the misfortune to graduate in the class of 2009, and could find paid work only as a lifeguard and a personal trainer. Unpaid internships at research institutes led to nothing. After more than a year he moved back in with his parents.

Millions of college graduates in rich nations could tell similar stories. In Italy, Portugal and Spain, about one-fourth of college graduates under the age of 25 are unemployed. In the United States, the official unemployment rate for this group is 11.2 percent, but for college graduates 25 and over it is only 4.5 percent.

The true unemployment rate for young graduates is most likely even higher because it fails to account for those who went to graduate school in an attempt to ride out the economic storm or fled the country to teach English overseas. It would be higher still if it accounted for all of those young graduates who have given up looking for full-time work, and are working part time for lack of any alternative.

The cost of youth unemployment is not only financial, but also emotional. Having a job is supposed to be the reward for hours of SAT prep, evenings spent on homework instead of with friends and countless all-nighters writing papers. The millions of young people who cannot get jobs or who take work that does not require a college education are in danger of losing their faith in the future. They are indefinitely postponing the life they wanted and prepared for; all that matters is finding rent money. Even if the job market becomes as robust as it was in 2007 – something economists say could take more than a decade – my generation will have lost years of career-building experience.

The uprisings in the Middle East and North Africa are a warning for the developed world. Even if an Egyptian-style revolution breaking out in a rich democracy is unthinkable, it is easy to recognize the frustration of a generation that lacks opportunity. Indeed, the “desperate generation” in Portugal got tens of thousands of people to participate in nationwide protests on March 12. How much longer until the rest of the rich world follows their lead?


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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More Kiwis headed west, Ross?


From Dan Denning in St.Kilda:

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise.”
F. Scott Fitzgerald



“One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise.”

And emigrate. ;)

“The next time Federal Reserve Chairman Ben S. Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working:……” Great then let Benny B stand up in front of the 11.2% of unemployed college graduates and explain just how great things are, given all of his brilliant financial maneuvering . The pathetic rationalization of QE2 must be like having salt rubbed in their (age 25 & under) wounds. It’s simply a house of cards built around a ponzi- scheme. One can’t help but marvel at the delusion, and then ask… Read more »
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