The Black Swan Myth
I've been seeing more and more people comment that we're in a black swan situation. The phrase black swan "refers to high-impact, hard-to-predict, and rare events beyond the realm of normal expectations." However, this phrase does not adequately describe the current recession. Below I will explain why.
First, a bit of history. One of the primary causes of the great depression was a series of bank failures from the years 1929-1933. In effect, there were three waves that greatly contracted credit and the money supply. As a result, the US economy contracted at a sharp rate leading to high unemployment.
That scenario appeared to be a strong possibility in September of last year when Lehman Brothers collapsed. In addition, on September 15, 2009 there was a "tremendous draw down" of money market funds. See this video starting about 2:00 minutes in.
These facts were the primary reason there was such a rush to move TARP through Congress. In retrospect TARP is a prime reason why -- despite the tremendous financial strain over the last 18-24 months -- there have been a relatively small amount of bank failures.
The point of the above information is this: there was no financial meltdown. As a result, one of the primary reasons that led to the Great Depression did not happen thereby lowering the possibility of a second Depression.
In addition, the Congress passed the stimulus package which is just now starting to hit the economy:
Not so fast, say the plan's authors. Larry Summers, director of the National Economic Council, says the stimulus already has contributed to the economy's recent stabilization. And Summers insists unemployment might already have hit 10% if the president hadn't acted. "I think the stimulus is just about on track, progressing about as we expected," he tells USA TODAY.
As of July 3, the administration says, about $217 billion of the stimulus is being felt throughout the economy. That breaks down into: $43 billion in payroll tax relief plus $174.9 billion the government has committed to contracts.In Boulder, Colo., Blake Jones, president of Namaste Solar, says the stimulus saved about 15 jobs at his small manufacturer. A $3 billion Treasury Department program converted an existing tax credit for solar investments to a direct payment, prompting commercial customers who no longer could benefit from a tax credit to go ahead with projects.
"The outlook was very bleak. ... Now we're anticipating not losing business, but we may continue growing," Jones said.
While critics complain that the stimulus has been slow out of the gate, Summers says the administration always planned for the stimulus to work over a two-year period. So far, the modest economic boost from the government coffers has been overwhelmed by other developments. Oil prices have risen from roughly $35 a barrel in February to just under $60 today, draining more than $165 billion from the economy on an annual basis. Partly in response, the July reading of consumers' expectations for the future took its biggest dive since October.
And let's not forget the Federal Reserve also dropped interest rates to -- well -- 0% after adjusting for inflation.
Simply put, there has been strong policy response to the crisis. While there is disagreement about various parts of the packages the point is Washington has not sat on their hands -- they have acted. And these actions have prevented a complete collapse and or meltdown of not only the US financial system but the economy. As a result, we're now in the middle of a severe recession not a black swan situation.
If the economy had continued in free fall along multiple indicators the black swan argument would have merit. But the economy has in fact started to stabilize (albeit at low levels). Consider these charts:
Auto sales have levels off, as have
retail sales and
real personal consumption expenditures.
On the employment front, today we learned that initial unemployment claims are still coming down (as is the 4-week moving average)
Simply there are multiple signs things are stabilizing albeit at low levels.
If the free fall had continued after the above mentioned policy actions, then the "black swan" arguments would be appropriate. But not in light of the information above. While things certainly are not great right now the evidence is the worst is behind us.
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yes I dou www.fmkariyer.com
Hale, I'd direct you to a HuffPo article which came out a day before yours, before you even tentatively pronounce "the worst is behind us". Normally, I love your posts and think you've been right on the money more often than not, but this time I think you're getting lost in your indicators and graphs. Read the following and I'd love to see a new post by you taking this news into account:
Commercial Real Estate Crash Would Cripple U.S. Banks
http://www.huffingtonpost.com/sheldon-filger/commercial-real-estate-cr_b_232293.html
Auto sales always trend up from late winter/ early spring to summer. The retail sales and consumption numbers have probably stabilized to a large degree because of unemployment checks, the payroll tax cut, and rebate checks -- basically govt transfer payments, which are unsustainable. The initial jobless claims have trended down in the past weeks because of the seasonal adjustments. Typically auto manufacturers shut down during mid-summer, but this year they've already been shut down for months. The non-seasonally adjusted claims numbers have trended up in recent weeks.
http://www.economagic.com/em-cgi/data.exe/dol/day-icunsa
You need to read your Roubini and catch up on what is really happening. If you want to consider Roubini in the mix we are not in a black swan situation. If you do not read him in the mix we are in a black swan situation. Your charts have run out of gas babe! You were good up to a point but you are lost in regard to the current situation. Your chart stuff is not cutting it. The problem you have is your charts only reflect the past and this is where you stop. Roubini knows how to use those charts and you should study him and his process.
i'm relieved that there is some sort of good news to look at to be honest
Hale,
How can you be so blind and not see that our economy is fundamentally flawed right now? The charts you are showing are anomalies created by a surge in money supply to the banks that is directly being infused into the markets. Companies values are being artificially inflated which is putting a little bit of cash in peoples pockets that is causing some of the retail stabiliziation you see in the charts. What you will see in the next few months will be poorer financial statements for the companies currently benefiting from the money infusion. Small business and construction is in big trouble because the credit markets are still frozen.
When the fed tries to contract the money supply the markets will move right along with it.
passing trends are no guarantee of future performance
I'm still in awe at how this author can excuse the FED is this disaster as well as the Great Depression.....and then actually cheer their lowering of interest rates as saving us. LOL! For now on....I will skiip reading of such nonsense!
You miss the point of what is meant by a black swan. The 'black swan' is a set of factors that cannot be forseen that can cause an unexpected occurrence. Black Swans can be positive or they can be negative. The point of the 'black swan' argument is that you can't rely solely on the predictive models, especially in economics, as if they were hard and fast science. They're not. Yet we treat them as such. Also, no matter how hard we try, our view of the future is limited. There are too many factors involved for us to speak with assurance about what will happen. When we get to a certain point we pattern our perception so that we let in the facts that support our point of view and screen out those facts that point us to other factors that contradict our point of view. I think the book calls for more humility in our endeavors and statements about what is working and why. In short, Greenspan may not have been a Maestro but a narrow supply sider who couldn't see any down side to de-regulation. His mental models prohibited him from seeing the outliers. Then the subprime crisis hit. It was a black swan.
Two aspects here. The black swan as the completely unexpected is one way to think about it (think of Monty Python and the Spanish Inquisition). The other more subtle aspect is that the math diverges from classical "normal" statistics. This latter is actually the better suited because it explains much of what the quants on Wall Street completely screwed up on.
Actually many quants I know never assume Gaussian distribution and are very familiar with leptokurtic distributions and fat tails. It was known that market data was not Gaussian for a long time before Taleb's enjoyable book appeared. In my opinion, Wall Street was and is a massive money machine running on fumes with the fundamental problem that America has lost much if not most of its once formidable manufacturing capability.
The twin pillars of outsourcing white collar jobs to foreign countries and insourcing of cheap blue collar jobs from Mexico has taken its toll.
Given the greed of major corporations, I see no reason these dynamics will change.
But for quants, life is wonderful. Volatility is the life blood. Just look at Goldman's numbers this last quarter. Even better, Wall Street can use even less risk management ( if that is even possible ) than in the past. Wall street knows Washington will bail them out if things go sour.
Heh! "Bonddad" is about the last commentator I would ever accuse of sugar-coating bad economic news, but....
That last graph, "New Jobless Claims." To derive from that the current unemployment rate, one must subtract the rate of new hires (pretty low, right about now) and integrate the resulting curve with respect to time. Means that, if that "New Jobless Claims" chart isn't pretty darned close to flat line zero, then we got trouble. (right here in River City!)
“One of the primary causes of the great depression was a series of bank failures from the years 1929-1933.”
And there was me thinking, it was the result of permitting people to wager on an outcome with monies they did not actually have. Not too dissimilar from today really.
But hey, its your reality. Go for it.
The Black Swan is a name for a variety of "fat tail" probability situations. It is a mathematical formulation that you just can't throw around by using analogies. As a case in point, the discovery of oil is a fat-tail type of probability distribution because of the huge variation of rates in search effort. The same goes for the size distribution of oil fields as the number of large oil fields is small but large in comparison to what would normally be predicted from the number of small fields would predict. The numbers and the models both reinforce that these exhibit fat-tail features. Essentially, the "normal" probability distribution breaks down in such cases.
The issue is that most people use normal approximations where in reality they just don't work. Economics is a dismal science because the economists who practice it rely on voodoo rhetoric and don't do any formal analysis. They seek convenience when the math gets too hard for them.
Most of the uses and even definitions of "black swan even" i am reading are incorrect. basically it connotes events that are unforeseen and completely upturned information we previously held with certitude. Its like if we constructed our entire understanding of reality around our knowledge of the fact that there are no unicorns...... then one turns up. what happens to THAT little constructed universe? the problem with the financial crisis is that it was not really unpredictable. the illusion buying into the belief was that some untested mechanisms for minimizing loss and thus mitigating disaster would work, the notion that somehow everyone could simultaneously invest at high risk for high profit and then bet against losses.
Hal, are you an apologist for the Obama Administration? Your example of stabilization is U.S. cars sales have fallen nearly in half, but seem to have quit falling. You mention no financial meltdown. Why? Because Goldman Sachs and J.P Morgan might survive the cirs to government help.
What about CIT? They could go under any day and the loan money to hundreds of thousands of small businesses that Goldman Sachs and J.P. Morgan wouldn't touch. Hal, we are in a credit crisis akin to the 1930's. Only this time it is primarily the shadow banking system that has accounted for over 70% of the nation's credit the last few years that is going under.
We are in a new great depression. Unless the broken credit markets are fixed the economy will continue to go down.
http://www.escapethenewgreatdepression.com
and besides,
"" Many loans initiated when the prices of commercial properties were at their peak will be coming due over the next 3 years, including $400 billion by the end of 2009, and nearly $2 trillion by 2012. With unemployment skyrocketing, real disposable income shrinking and nearly 7% of income now being saved by the chastened American consumer, it is a foregone conclusion that a greater proportion of these loans will become non-performing. In the current economic climate, there are simply no options available in terms of refinancing and securitization. As with housing, a glut of foreclosed commercial properties will further depress prices, creating a vicious concentric circle of financial doom. ""
http://www.huffingtonpost.com/sheldon-filger/commercial-real-estate-cr_b_232293.html
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