Bigger black swan events

Posted By Darren Winters on May 15, 2018


Bigger black swan events

Bigger black swan events could be on the horizon. The 2008 financial crisis was considered a black swan, an event outside the “ mass mind matrix” that nobody was able to forecast. Bigger black swan events could be lurking in today’s financial market, the world is in a tangle. A US-China trade war is looming, there is a tax war too. There is an ongoing geopolitical crisis in the middle east, Iran/Syria (internal link) with the nuclear superpowers (US and Russia) already fighting a regional proxy war which could potentially escalate into a global war.

Moreover, there is a renewed risk of a banking sovereign crisis in Europe being magnified into a potentially bigger black swan event. Perhaps it is no surprise then that billionaires Musk and Bezos want to use their fortune, escape to the skies and colonize space.

But back down to earth bigger black swan events could potentially wreak havoc on investment portfolios. A renewed European sovereign bond crisis could be one of the above mentioned bigger black swan events.

Behind the charade of normality, another more menacing European banking crisis looms

Bigger black swan eventsIn what was probably the most important and under-reported financial story of the year so far was that Deutsche Bank simulates a crisis scenario (internal link broken), according to a report from Germany’s Süddeutsche Zeitung newspaper dated April 1.

So a cocktail of under-performing European loans stirred in with another eurozone sovereign debt crisis and shaken has the potential of being a bigger black swan event going forward.

Europe’s sovereign debt crisis could merely have been delayed within even more debt.
But the real story is that most of the 19 member countries in the Euro-zone have not had to sell their debt to any hard-nosed investors post-financial crisis. Put another way, European’s sovereign debt market has been propped up the bank of last resort, the European Central Bank (ECB). The ECB expanded its monthly purchases under its Assets Purchase Program (APP) from 60 billion to 80 billion Euros a month in 2016 during the so-called “economic recovery”.

Moreover, the Italian banking sector is beginning to look more like the leaning tower of Pisa minus the tourists. In a few words, the total sum of Italian bad loans or nonperforming loans (NPL) exceeds total market capitalization of the entire sector.

What will Europe do to prevent these Bigger black swan events in NPLs and sovereign debt from triggering a crisis of confidence in the single bloc currency, the Euro? Will Germany, a major creditor write off the debt? That is unlikely, bearing in mind that Deutsche Bank is already circling the drain. Moreover, more crippling austerity, particularly in the peripherals could ignite a political crisis.

So what will the ECB do to prevent these black swan events?

More of the same, the ECB will create more money which it then funnels to Italian Central Bank and finally the Italian Government borrows the money by selling bonds to Italian Banks. When the Italian Government runs out of money the process is repeated again and again until a bigger black swan event occurs, in other words, a crisis of confidence in the ECB, a monetary crisis. The above vicious circle is also relevant to other sovereign peripheral debt members of the EU (Portugal, Spain, Greece, and Ireland). Meanwhile, the ECB is mulling over the plans to tackling euro’s bad loans pile.

Some say this is putting the ECB’s credibility at stake. “One cannot say that NPLs are one of the biggest risks for the European banking sector and a top priority and then fail to act.”

Moving onto other potential black swan events is the rise of protectionism

In Europe, it is unclear what impact Brexit will have on European trade. Will a weak Theresa May Government be able to secure the best deal for Britain? But will the EU collapse under its own weight of non-performing loans, a potential new sovereign debt crisis and a political crisis that more austerity could cause? So Europe makes for bigger black swan events and as the Euro starts to look shaky again all that could make USD and GDP denominated assets look more solid, after all, perceived risk is a question of relativity.

Furthermore, across the Atlantic, the bigger black swan events center around a looming US-China trade war. Will the current Trump administration take it too far, could a trade war escalate into a shooting war with China? History says yes. More than 1,100 US economists (15 Nobel two Republican and two Democratic presidents laureates) signed a letter sent to President Donald Trump and to Congress on May 3 urging the administration to avoid repeating the mistakes that worsened the Depression which led to political instability in Europe and eventually war.

With respect to geopolitical events, there are also bigger black swan events lurking.
President Trump’s strongman approach in North Korea has been spectacularly successful. In a historic moment Kim Jong-un and the South Korean president, Moon Jae-in, came face to face at the border. Kim Jong-un has promised to halt his missile program and the two leaders have offered lasting peace for the peninsula. Trump’s Mafia boss style of doing business, drag the other side to the edge of the cliff, make them see certain death, leave them there until they are shaking with fear, then drag them back and put your arm around them, smile and say let’s do a deal worked with North Korea.

Trump’s claimed that threat from North Korea will be met with “fire and fury like the world has never seen” was taken seriously. Kim Jong-un probably out of fear contacted his South Korean counterpart and said if the American’s nuke the Asian continent again we will all die from the fallout. So they took to the global stage and made peace. But as the world breathed a sigh of relief just 24 hours later the Iran crisis went red hot. The UN fears that scrapping the Iranian deal could mean that the US and Israel will fight Iran which could spark WWW3. The risk of “World War III” breaking out in the Middle East is intensifying at an alarming rate” said UN Secretary-General Antonio Guterres.

The bigger black swan events could play out with Trump now basking in the glory of his first foreign policy success in North Korea. Trump will believe even more in the idea of peace through brute force and the “winner effect” could lead to a spectacular miscalculation by the Trump administration. Put another, what if Trump’s nuclear nightmare diplomacy fails with Russia and China?

So bigger black swans could be lurking.

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