THE term “black swan” is supposed to refer to those events that are completely unforeseen and, therefore, cannot be planned for. There are very few of these sorts of events. Much more common are the “hidden lion” occurrences where you know the event is hiding in the bushes but ignore the possibility and, therefore, do not prepare.
As the year comes to an end, large financial institutions sit down and try to figure which “swans” or “lions” may be coming and what preparations might be made.
As I have written, there have been many political “surprises” this past year that were to be expected as the long-term political cycle changes. This cycle mandates that voters across the world will reject the status quo and sometimes turn 180 degrees from the current political regimes. Canada went from “right” to “left” even as Argentina just moved from “left” to “right”. Many of these changes caught the establishment completely off guard.
French international banking firm, Société Générale (SocGen), recently released its list of black swans or hidden lions for 2016.
The event given the highest probability at 45 percent is that Great Britain will vote to leave the European Union (EU) in 2016. The significance of this event in practical terms for both Britain and the EU (for example, Britain no longer being subject to the EU rules on food conformity) is not as important as the message it would give to other EU members. Membership in the EU is supposed to be like joining the Mafia. Once you get in, you cannot get out. However, if Britain does vote to opt out, moves in other nations where there is a growing desire to quit would gain respectability and credibility.
China experiencing an economic “hard-landing” is second at 30-percent likelihood. Economic-types use the term “hard-landing” to describe a situation where excesses in the economy, like a too large a debt burden, cause a sudden crash. But even SocGen says that a Chinese hard-landing would be more like a slow no-growth collapse unless the Chinese government makes some sort of huge policy error.
Third on SocGen’s list is that consumers in the West will suddenly start doing the unthinkable—save money instead of spend. Although economic growth in the US and Europe is well below annual averages for the past decades, what little growth there is has gone to buying things. If consumers start saving for the future and not buying for the present, even the current feeble economic growth could disappear. If this happens, all the current economic forecasts for 2016 will have to be thrown away.
Here in the Philippines we tend to focus on the obvious rather than on the unlikely. Earthquakes, typhoons, and China are where most of our “black swan” thinking center. None of those issues are swans or lions. We can prepare for natural disasters even if the timing is unknown. An exclamation with China over the territorial claims unfortunately must be placed in the “We’ll cross that bridge when we come to it” file. If, for example, a Filipino fishing boat is sunk by a Chinese naval vessel, there is not much we can do to prepare for it. Further, there is not much we can do to prevent it.
While the presidential and national elections in May 2016 are already caught in controversy over the eligibility of Grace Poe and now Rodrigo Duterte, I see a potentially greater problem lurking. What if, for example, there were serious, widespread, and valid concerns over the results? We always think about anomalies in Philippine elections as due to fraud. However, as the voting process become more automated, technology breakdowns are more likely to happen. Certainly the first thought would be cheating, just like I always think my Internet is down because SKYCable hates me in particular. But sometimes, technology just breaks.
While everyone is thinking and greatly concerned about a stock- market crash, what if the opposite happened? Assume for the moment global conditions suddenly turned in a manner that foreign investors rushed to come into the Philippine stock market. Although local investors might think this as a Divine gift, a sudden “boom” could be as chaotic as an event of sudden “doom”.
Stock markets function better when trends are established over time and, therefore, become sustainable. Very rapid stock-market price crashes and upside price surges are more like a department store’s “Midnight Madness” sale. Buying or selling on price movements may not be sensible in regard to the trends.
No doubt there are other animals prowling around the Philippines waiting for 2016 to come.
*****
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.