Accurate and timely financial forecasting has always been difficult. Especially today, with so many distortions at work in the economy, I can confidently say that no one knows with any degree of precision what the future may bring.
However, I believe that there is a strong possibility that in 2010 the tender green shoots of 2009 will be violently chopped down to be replaced by a feast by a flock of black swans from hell. And that our economy will be the meal.
The concept of “Black Swans” was developed by Nassim Nicholas Taleb and refers to high-impact, hard-to-predict, and suppose to be rare events beyond the realm of normal expectations. In portfolio management these are events that are computed to be well outside of the range of statistical probability and are therefore considered to be of such low risk they are not considered relevant to the risk management of the portfolio.
Unfortunately, in 2007 and 2008 black swan events happened so close together and had such a disastrous effect on the world economy that so called “rare events” were occuring one after the other. There is no doubt that hedge fund operators, bank traders, and AIG managers had mispriced risk by huge margins. Black swans were everywhere. Nassim Taleb was right with his statements that black swan events happen far more often than anticipated by number crunchers and portfilio managers.
I have previously posted in my Taipan Investor Blog about Black Swan Events. Those readers not that familiar with the black swan concept may want to read the post before pressing forward. Financial events in 2009 have paved the way for a flock of really nasty black swans to emerge in 2010 – the black swans from hell.
Since by their very definition black swan events happen without warning forecasting their arrival is indeed a tricky business. However, actions already taken by the United States government, various USA state governments, and governments of other developed and developing nations move forward the probability of 2010 being a black swan hell off the charts. Here is why. For the reasons go to Feast of the Black Swans.