Looking For A Black Swan

There is real fear the US economy may see a double dip soon. A quick glance at the housing market following the expiration of the government credit and the heap of banking regulations coming soon seem to confirm the inability of the economy to generate necessary credit to sustain the recent growth. Why would banks want to lend to a consumer who is unable to repay when the government is dictating to them how much loans they can make and how much fees (and who knows what else) they can charge. Better yet, why would they lend when they can have their cash parked with the Treasury earning a guaranteed return. The US economy is facing deflationary pressure just like the EU is. The growth we have seen over the last year or so comes from cost cutting and not from increased revenues for companies have no pricing power. It seems department stores, and others, have daily sales going on. Combine this with heavy cost cutting and you have the unsustainable growth we all celebrated. Unlike China our stimulus money is still kept,for the most part, within the banking system (that is between the Fed and the Treasury) and therefore has not had the multiplier effect that usually accompanies such stimulus spending (ironic, because that is the exact reason for a stimulus). The challenges facing the US economy in the coming months are many and serious. Unemployment is stubbornly high and likely to remain so for few years. Difficult times await the Dollar as well as Treasuries. Our deficit is simply too large and will prove costly to finance going forward when either interest rates inch higher or when buyers shy away from Treasuries. The most serious problem facing the economy is the future of our banking system and its ability to innovate and be competitive (more on that in a future blog).

Europe and China are facing their own economic problems. In the case of China too much growth that has created a bubble or two. Nonetheless the end result is the same, but perhaps to a varying degree. In the age of globalization it is difficult to see how the world's main economies can grow when they are dependent on each other at a time they all seem to be heading in the same wrong direction. So how do we get back on track to growth? there is only one sure and quick solution; and that is a pretty heavy shock to the system. By that I mean stop all government interventions and let the chips fall where they may. This is a harsh but necessary treatment. The risks are high but less so than following a path of slow economic self-destruction. It is all about duration. It makes more sense to suffer the same consequences over a shorter period of time; then we can get on with the recovery. The crisis we have experienced is not your garden variety one and therefore normal government intervention is not effective.

Geopolitical events may yet give another boost to slowing world recovery. The west, lead by the US, is moving forward with plans to impose sanctions against Iran despite its agreement with Turkey and Brazil regarding its enriched uranium. North Korea is threatening war against South Korea; and a potential war between Israel and Hizballah threatens to go regional.

In his book Nassim Taleb defined a black swan as a rare event with an extreme impact and retrospective predictability. Are we about to witness a black swan so close to the recent one (the financial crisis of 2007-2009)? If so in what form or medium? Is the collapse of the US dollar the next black swan? Could an Israel attack on Iran transform oil into a black swan event? or would the heavy burden of the US deficit turn Treasuries into swans? Perhaps the ultimate black swan will turn out to be golden because of the lack of confidence in the world's major currencies. No matter what the answer is there is a way to profit from it, assuming one is right of course. In that case I want my reward to be a black swan one indeed.