Sancai News: Will there be a "black swan" event in 2024?

[New Sancai first release] In the field of finance and economics, impossible does not always mean impossible. Catastrophic events thought to be beyond the realm of possibility do occur. These rare events are called "black swan" events.

The term "black swan" was coined by mathematician Nassim Nicholas Taleb and refers to the idea that just because we don't see something, it doesn't mean it can't exist. That is, even if we only see white swans, it does not mean that black swans are not there.

Currently, analysts believe that a black swan event is imminent. They didn’t know what it was, they just knew the impact would be huge.

Understanding black swans

Think of a bell curve—a mountain graph that shows how often things happen. The most desirable results are near the summit (the highest part), while the rarer stuff is on the sides. Like sand pouring out of an hourglass. Most of it will fall right below the opening. As you move from the center of the area toward the edges, you'll notice less and less sand scattered around it. On the farthest edge, those strange grains of sand are black swans.

Taleb outlines three unique criteria for classifying an event as a black swan:

• Extremely rare: Black swan events are unanticipated or anticipated. They are outside the realm of conventional expectations because they have never or rarely happened before.
• Serious impact: The impact of black swan events is severe and widespread. They can have significant consequences, affecting numerous individuals, systems or markets, often with damaging or catastrophic results.
• Hindsight: After a black swan event occurs, people often try to explain why it happened and attribute it to seemingly predictable factors. This is a retrospective bias because black swan events, by their very nature, are difficult to predict before they occur.

Examples of black swan events include the collapse of Lehman Brothers in 2008, which triggered the global financial crisis, the 2018 epidemic, and the September 11 attacks on the World Trade Center.

While black swan events can come from anywhere, three areas currently stand out.

banking

The banking crisis in 2023 has been designated as a black swan event. Rapidly rising interest rates have put regional banks in trouble. After the collapse of Silicon Valley Bank and Signature Bank, First Republic Bank became the second largest bank to fail in U.S. history. It was shut down by regulators and sold to JPMorgan Chase.

In hindsight, the reasons seem pretty clear. But no one acknowledged in advance that the system was flawed. Asset liability management, accounting for held-to-maturity securities and the impact of deregulation of mid-sized banks with less than $250 billion in assets were never addressed.

The banking crisis is still brewing. According to one study, nearly 190 banks are vulnerable to failure. High interest rates caused the crisis. Continued high interest rates and tighter financial conditions will expose more cracks in the system. If the system collapses further as conditions worsen, a sequel to the banking black swan could be in our future.

real estate

The real estate market is considered a prime location for black swan events. Economists are concerned because the 2008 U.S. housing market crash led to a recession. This time, high mortgage rates, limited inventory and reduced income may be triggering factors.

The Case-Shiller Index is a measure of residential home prices across the United States. These indices are designed to accurately track changes in residential real estate values over time.

In 2006, there was a 69-point difference between the Case-Shiller home price index and actual disposable income. This difference in size led to massive foreclosures and economic collapse.

Today, the spread is 136 pips. Experts calculate that house prices are approximately 80% higher. In other words, the bubble is about to burst. A recession, rising unemployment and soaring debt could trigger a massive sell-off. The residential market could become as dangerously unstable as the commercial real estate market.

Likewise, U.S. commercial real estate may also be at risk this year as about $117 billion in loans to offices across the country are coming due and must be repaid or refinanced, with a large portion at risk of default, which could create problems for banks and developers. The price will be high, and some of them will even become insolvent. It could also increase the likelihood of triggering a recession.

national debt

The huge debt of the United States is also considered to be the main catalyst for black swan events. Currently, public debt exceeds $34 trillion. In 2008, it was only US$9.7 trillion, and in 1968, it was only US$345 million. A debt ceiling agreement in the spring of 2023 would add $4 trillion to the debt over the next few years. Economists now predict that the debt could reach $50 trillion by 2030.

There is a lack of political will to solve the problem. Reducing the debt requires deep spending cuts (opposed by Democrats) and new higher taxes (opposed by Republicans). Analysts believe that a black swan event is most likely to occur when trust reaches a tipping point and a government's ability to repay its debt is lost. Debt servicing may eventually outweigh defense and Social Security payments.

in conclusion

Although no one can predict whether a black swan event will occur in 2024, everyone should think more about whether they are prepared accordingly in the event of a black swan event.

There is a school of thought that allocating a portion of a portfolio to a precious metal like gold can serve as a hedge against future uncertainty, as gold tends to retain its value during economic downturns. Black swan events highlight the potential for unforeseen circumstances to occur, so it is prudent to purchase some form of insurance, especially when it is relatively cheap compared to the potential cost of getting into trouble without insurance. But how to choose depends on each person's perspective on risk tolerance and future expectations.

(Author: Fang Mingguang)

(Editor: Jiang Qiming)

(Source of the article: First published by Xinsancai)