All predictions are wrong. Or are they?
January 7, 2009 2:13 AM Subscribe
Every year the Strategy Team at Saxo Bank, a Danish virtual bank, publishes a list of ten black swan class market events. Some of the more dramatic possibilities Saxo advance for 2009: crude trading down to $25 a barrel causing severe social unrest in Iran, the S&P 500 falling to 500, Chinese GDP approaching zero and several member states dropping the Euro. The complete 2009 list is here and for completeness their 2008 [ .pdf ] , 2007 [ .pdf ] and 2006 lists [ .pdf ] are also available.
Popularised by Nassim Taleb's The Black Swan: The Impact of the Highly Improbable, black swan events are by definition statistical outliers. Low in probability but potentially high in impact, even in the best of times prudence would dictate market participants at least be aware of - if not plan for - all possibilities.
Popularised by Nassim Taleb's The Black Swan: The Impact of the Highly Improbable, black swan events are by definition statistical outliers. Low in probability but potentially high in impact, even in the best of times prudence would dictate market participants at least be aware of - if not plan for - all possibilities.
So is Black Swan predictions just making shit up? Do they work backwards from improbable events that would cause a major impact, or try and apply crises or odd events that have already happened in some sectors of the market to other sectors?
I don't know how to play, but I'll throw one in. The tech sector is savaged in the fourth quarter when HP bets 11 billion on the predictions of a secret prototype memristor based neural network. Ok, maybe not in 2009.
posted by BrotherCaine at 2:59 AM on January 7, 2009
I don't know how to play, but I'll throw one in. The tech sector is savaged in the fourth quarter when HP bets 11 billion on the predictions of a secret prototype memristor based neural network. Ok, maybe not in 2009.
posted by BrotherCaine at 2:59 AM on January 7, 2009
Actually, Mutant, I have read your first link, and Saxo Bank doesn't say anything about "several member states leaving the Euro":
The EU is likely to crack down on excessive government budget deficits in several member states, and Italy could live up to previous threats and leave the ERM completely.
So, Saxo Bank regards the possibility of "several" member states leaving the euro as too outrageous even for their list, considers this event solely for Italy, and even then qualifies it. Much as some British eurosceptics seem to regard the possibility of an euro stampede with relish and trepidation, it is notable that this is seen as exceedingly improbable by about everybody else...
Besides that, Saxo Bank's predictions re. the "pre-ins" pegged to the Euro in the Exchange Rate Mechanism could be somewhat self-serving self-fulfilling prophecies. Saxo Bank is a Danish bank, and one of those pre-ins (and the most likely to join the euro next) happens to be Denmark. A referendum on Denmark joining the Euro is very likely this year, and the polls are overwhelmingly favourable. If Saxo Bank has a significant stake in the Danish krona trade, sowing a little gloom and doom about the Euro (as they seem to do in this year's Black Swans) may not be entirely uninterested...This is my raised eyebrow.
posted by Skeptic at 3:14 AM on January 7, 2009 [2 favorites]
The EU is likely to crack down on excessive government budget deficits in several member states, and Italy could live up to previous threats and leave the ERM completely.
So, Saxo Bank regards the possibility of "several" member states leaving the euro as too outrageous even for their list, considers this event solely for Italy, and even then qualifies it. Much as some British eurosceptics seem to regard the possibility of an euro stampede with relish and trepidation, it is notable that this is seen as exceedingly improbable by about everybody else...
Besides that, Saxo Bank's predictions re. the "pre-ins" pegged to the Euro in the Exchange Rate Mechanism could be somewhat self-serving self-fulfilling prophecies. Saxo Bank is a Danish bank, and one of those pre-ins (and the most likely to join the euro next) happens to be Denmark. A referendum on Denmark joining the Euro is very likely this year, and the polls are overwhelmingly favourable. If Saxo Bank has a significant stake in the Danish krona trade, sowing a little gloom and doom about the Euro (as they seem to do in this year's Black Swans) may not be entirely uninterested...This is my raised eyebrow.
posted by Skeptic at 3:14 AM on January 7, 2009 [2 favorites]
Chinese GDP growth approaches zero.
For a moment there I thought they were predicting that the whole population would just keel over and die.
posted by Dumsnill at 3:40 AM on January 7, 2009 [3 favorites]
For a moment there I thought they were predicting that the whole population would just keel over and die.
posted by Dumsnill at 3:40 AM on January 7, 2009 [3 favorites]
I think most of these are believable. Some of them are already happening.
Iran is already scaling back its net of subsidies and other forms of social spending due to the falling price of oil. Add in push and pull between different factions within the regime, as well as secularists, throw in a pinch or two of CIA or Shin Bet actions to undermine the regime, and yes, I think you will see all sorts of unrest in Iran. They have an election coming soon as well, yes?
The pull of businesses towards Eastern Europe might not abate, particularly if an improved profit margin is at stake. Cheaper labour and cheaper oil will only accelerate that push. Sure, the markets might become more regulated, particularly as governments try to put the brakes on unemployment. But I don't think that the increased regulation will stop someone who can move operations from doing so.
I do think that it will be interesting to see how financial services companies act vis a vis Eastern Europe. It's been a couple of years since I had any actual professional experience in this area, so I'm behind the curve a bit... but a year or so ago, countries like Romania, Hungary and the Ukraine were seen as growth areas for financial services companies, particularly lenders. With currency markets being in such turmoil and the increased concern about risk management (i.e. increased capital requirements, the EU sticking its nose in a bit more), I wonder what will happen when the growth in the growth area possibly dies out.
One thing that's left off the list is increased anti-immigrant feeling and social unrest in western Europe. Or am I being a bit apocalyptic?
posted by Grrlscout at 3:49 AM on January 7, 2009
Iran is already scaling back its net of subsidies and other forms of social spending due to the falling price of oil. Add in push and pull between different factions within the regime, as well as secularists, throw in a pinch or two of CIA or Shin Bet actions to undermine the regime, and yes, I think you will see all sorts of unrest in Iran. They have an election coming soon as well, yes?
The pull of businesses towards Eastern Europe might not abate, particularly if an improved profit margin is at stake. Cheaper labour and cheaper oil will only accelerate that push. Sure, the markets might become more regulated, particularly as governments try to put the brakes on unemployment. But I don't think that the increased regulation will stop someone who can move operations from doing so.
I do think that it will be interesting to see how financial services companies act vis a vis Eastern Europe. It's been a couple of years since I had any actual professional experience in this area, so I'm behind the curve a bit... but a year or so ago, countries like Romania, Hungary and the Ukraine were seen as growth areas for financial services companies, particularly lenders. With currency markets being in such turmoil and the increased concern about risk management (i.e. increased capital requirements, the EU sticking its nose in a bit more), I wonder what will happen when the growth in the growth area possibly dies out.
One thing that's left off the list is increased anti-immigrant feeling and social unrest in western Europe. Or am I being a bit apocalyptic?
posted by Grrlscout at 3:49 AM on January 7, 2009
Grrlscout: I'm afraid you aren't being too apocalyptic. I don't expect an anti-immigrant backlash in France or Germany, but it's already very much already happening in Italy, and I'm worried about Spain, Ireland and Britain, where there was a lot of immigration in the last years and unemployment can be expected to shoot up in the next months.
posted by Skeptic at 4:15 AM on January 7, 2009
posted by Skeptic at 4:15 AM on January 7, 2009
For a moment there I thought they were predicting that the whole population would just keel over and die.
$2T in USD savings vs. ~$3T GDP implies the Chinese could pretty much take 2009 off if they wanted to.
posted by troy at 4:41 AM on January 7, 2009
$2T in USD savings vs. ~$3T GDP implies the Chinese could pretty much take 2009 off if they wanted to.
posted by troy at 4:41 AM on January 7, 2009
So, Saxo Bank regards the possibility of "several" member states leaving the euro as too outrageous even for their list, considers this event solely for Italy, and even then qualifies it. Much as some British eurosceptics seem to regard the possibility of an euro stampede with relish and trepidation, it is notable that this is seen as exceedingly improbable by about everybody else...
I was just having this argument on the possibilities of member states backing out on the Euro with a friend the other night when I realized that I didn't know enough to make a good argument. What's the case against the Euro for Italy, and in general? Aside from the obvious, i.e. it restricts flexibility and constrains decisions re: monetary policy?
posted by foxy_hedgehog at 6:01 AM on January 7, 2009
I was just having this argument on the possibilities of member states backing out on the Euro with a friend the other night when I realized that I didn't know enough to make a good argument. What's the case against the Euro for Italy, and in general? Aside from the obvious, i.e. it restricts flexibility and constrains decisions re: monetary policy?
posted by foxy_hedgehog at 6:01 AM on January 7, 2009
Sony sells PlayStation to Apple whose stock skyrockets 17.4%.
Chrysler bought out by the government of Kyrgyzstan. Shares plummet 17.4%.
You'll notice that these are both dramatic and highly improbable events and I am now a leading economist.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:10 AM on January 7, 2009
Chrysler bought out by the government of Kyrgyzstan. Shares plummet 17.4%.
You'll notice that these are both dramatic and highly improbable events and I am now a leading economist.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:10 AM on January 7, 2009
What's the case against the Euro for Italy, and in general?
There's a severe Nord-South division in the EU, when it comes to monetary policies and prudential government accounting. In the past Italy, and Greece, and Spain, always got out of trouble by printing more of their own money, or devaluating their coin in regard to the Deutschmark. Since they're part of the EMU, their politicians can no longer use this trick.
posted by ijsbrand at 6:24 AM on January 7, 2009 [1 favorite]
There's a severe Nord-South division in the EU, when it comes to monetary policies and prudential government accounting. In the past Italy, and Greece, and Spain, always got out of trouble by printing more of their own money, or devaluating their coin in regard to the Deutschmark. Since they're part of the EMU, their politicians can no longer use this trick.
posted by ijsbrand at 6:24 AM on January 7, 2009 [1 favorite]
Those are awfully pedestrian predictions, EMRJKC94.
Wombat futures up 63% on news that their urine is saturated with magnetic monopoles.
Skynet appointed CEO of GM. Share price actually rises.
posted by ROU_Xenophobe at 6:25 AM on January 7, 2009
Wombat futures up 63% on news that their urine is saturated with magnetic monopoles.
Skynet appointed CEO of GM. Share price actually rises.
posted by ROU_Xenophobe at 6:25 AM on January 7, 2009
The commodities bubble has already burst, so they're a day late and a dollar short with that one. Oil won't hit $25/bbl, for the same reason it didn't hit $200/bbl - the market is acting irrationally, and will correct itself. $55/bbl is a reasonable floor for recovery at this stage in the peak-oil game, trending up faster than inflation over the course of the next few decades.
These aren't black swans. Black swans are events that by their nature are unpredictable - their impact is immense, because they could not be accounted for in a given model. The most you can do is identify a potential for this kind of event, and have a plan for when the model fails.
Their list is, instead, very guarded bad-case scenarios, and still operates under the assumption that they can predict unpredictable events with current fads and trends, instead of peeking into the really dark and forgotten corners to see what's brewing that could upset current orthodoxy completely.
Like when BOA cements a stranglehold on the small mortgage brokers, cutting the other big lenders out of the loop completely, offering the little guys credit at reasonable rates when no-one else can or will. How do I know this? I talk with mortgage brokers. What will a Microsoft-monopoly of the mortgage lending markets bring? I can't predict that, no-one can, it upends previous assumptions completely - that's a Black Swan.
posted by Slap*Happy at 6:29 AM on January 7, 2009 [1 favorite]
These aren't black swans. Black swans are events that by their nature are unpredictable - their impact is immense, because they could not be accounted for in a given model. The most you can do is identify a potential for this kind of event, and have a plan for when the model fails.
Their list is, instead, very guarded bad-case scenarios, and still operates under the assumption that they can predict unpredictable events with current fads and trends, instead of peeking into the really dark and forgotten corners to see what's brewing that could upset current orthodoxy completely.
Like when BOA cements a stranglehold on the small mortgage brokers, cutting the other big lenders out of the loop completely, offering the little guys credit at reasonable rates when no-one else can or will. How do I know this? I talk with mortgage brokers. What will a Microsoft-monopoly of the mortgage lending markets bring? I can't predict that, no-one can, it upends previous assumptions completely - that's a Black Swan.
posted by Slap*Happy at 6:29 AM on January 7, 2009 [1 favorite]
These aren't black swans. Black swans are events that by their nature are unpredictable...
You're confusing black swans with iridescent, color-changing, bio-luminescent swans.
posted by StickyCarpet at 6:47 AM on January 7, 2009 [1 favorite]
You're confusing black swans with iridescent, color-changing, bio-luminescent swans.
posted by StickyCarpet at 6:47 AM on January 7, 2009 [1 favorite]
In the past Italy, and Greece, and Spain, always got out of trouble by printing more of their own money, or devaluating their coin in regard to the Deutschmark.
Actually, ijsbrand this perception (rather common in Northern Europe), is wrong. Italy, and to a lesser extent Greece may indeed have made frequent use of the printing presses, but Spain has always (and I do mean always, ever since the peseta became a floating currency) had a rather hawkish monetary policy, now matched by similarly hawkish fiscal policies. Have a look at the fiscal deficit and debt figures of those countries and you'll see the obvious differences.
In fact, Italy is, if anything, now less likely than ever to leave the euro. Some politicians in Berlusconi's party used to be very critical of it for rather populistic reasons (the euro was blamed for inflation), but now they see that, if Italy was to leave the euro now, and let their new-old currency devaluate, the debt burden would almost certainly lead to a sovereign default. Even more so in Greece. For Spain, public finances would cope with leaving the euro, but it would be lethal for households: the interest rates would shot up, and the over-indebted Spanish households, most of which hold Adjustable Rate Mortgages, would get a horrible thumping. Iceland would be a picnic compared to it.
posted by Skeptic at 7:05 AM on January 7, 2009 [1 favorite]
Actually, ijsbrand this perception (rather common in Northern Europe), is wrong. Italy, and to a lesser extent Greece may indeed have made frequent use of the printing presses, but Spain has always (and I do mean always, ever since the peseta became a floating currency) had a rather hawkish monetary policy, now matched by similarly hawkish fiscal policies. Have a look at the fiscal deficit and debt figures of those countries and you'll see the obvious differences.
In fact, Italy is, if anything, now less likely than ever to leave the euro. Some politicians in Berlusconi's party used to be very critical of it for rather populistic reasons (the euro was blamed for inflation), but now they see that, if Italy was to leave the euro now, and let their new-old currency devaluate, the debt burden would almost certainly lead to a sovereign default. Even more so in Greece. For Spain, public finances would cope with leaving the euro, but it would be lethal for households: the interest rates would shot up, and the over-indebted Spanish households, most of which hold Adjustable Rate Mortgages, would get a horrible thumping. Iceland would be a picnic compared to it.
posted by Skeptic at 7:05 AM on January 7, 2009 [1 favorite]
I have to agree with Slap*Happy that these guys aren't really listing potential Black Swans. Aside from SH's point that Black Swans by definition aren't predictable (by this token some say that the current crisis is not a Black Swan due to the number of people who saw it coming), many of the items on their list are outcomes as they are presented and not the improbable event that created the outcomes. For example, their predictions on currency movements aren't tied to either to a specific upcoming "unforeseen" event - they're just pessimistic extrapolations of the current environment. If you forced yourself to look at some of these as causes (rather than outcomes), you would also run into trouble because they don't have disproportionately large outcomes. "The AUDJPY will drop to 40. The decline in the commodities markets will affect the Australian economy" doesn't really capture the idea of outsized impacts that is at the core of the Black Swan idea. Here are my take on 5 fantasy scenarios for '09, inspired by Saxo's list: 1. Iran, facing social unrest due to budget shortfall, breaks its OPEC quota by 20%. Realizing the Prisioner's Dilemna is a bitch, other oil producers follow suit in a race to the bottom that drops oil to $10 a barrel. 2. The Euro, following EU infighting over monetary policy, fluctuates by unheard of amounts sending Porsche (VW/Audi) and BMW in bankruptcy as they get burned in raw materials costs and revenue. 3. Obama is shot and temporarily disabled. He recovers, but temporary uncertainty over the sucession sends the Dow to 5000. 4. China balks at continuing to buy US debt, and essentially takes control of US monetary policy ending policy of easy money. It also invades Taiwain, partially to utilize industrial capacity, but mainly for the hell of it 5. An early form of cold fusion is discovered after 40 years of failed attempts. The news wipes out Russia's nascent recovery and sends the ruble to lows not seen in 20 years.
posted by There's No I In Meme at 7:08 AM on January 7, 2009 [1 favorite]
posted by There's No I In Meme at 7:08 AM on January 7, 2009 [1 favorite]
Failures to use the Preview function correctly don't count as Black Swans either, damnit.
posted by There's No I In Meme at 7:10 AM on January 7, 2009
posted by There's No I In Meme at 7:10 AM on January 7, 2009
I still would like someone to explain to me why all this economic gloom and doom is bad news. For those of us in the middle class we've been experiencing a depression in wages for the past 30 years. When the fuck are we proles going to revolt and create a more egalitarian society? Where the hell is Winston Smith when you need him.
posted by any major dude at 7:51 AM on January 7, 2009
posted by any major dude at 7:51 AM on January 7, 2009
Didn't anyone listen to Rumsfeld: its not about the known unknowns, its the unknown uknowns.
posted by Damienmce at 7:55 AM on January 7, 2009 [1 favorite]
posted by Damienmce at 7:55 AM on January 7, 2009 [1 favorite]
the market is acting irrationally, and will correct itself.
So long as people continue to believe this we will have markets that act irrationally.
posted by stbalbach at 7:56 AM on January 7, 2009
So long as people continue to believe this we will have markets that act irrationally.
posted by stbalbach at 7:56 AM on January 7, 2009
the market is acting irrationally, and will correct itself.
So long as people continue to believe this we will have markets that act irrationally.
So long as people continue to believe this we will have people that are woefully uninformed and inflamed by hollow populism. You got a better explanation of commodities market movements?
posted by jckll at 8:16 AM on January 7, 2009
So long as people continue to believe this we will have markets that act irrationally.
So long as people continue to believe this we will have people that are woefully uninformed and inflamed by hollow populism. You got a better explanation of commodities market movements?
posted by jckll at 8:16 AM on January 7, 2009
Interesting link. Thanks OP. Funny timing. I just started reading Fooled by Randomness by Taleb. I had already read The Black Swan earlier. Taleb is a pompous asshole, but he has some fascinating ideas. (Just read his books and you'll see what I mean. I remember one passage in Black Swan where he claims he never watches videos anymore. Only serious literature is good enough for him.)
stbalbach, I agree. Markets are just a reflect of human trading behavior, and so they're only as rational the beings underlying that behavior. One only needs to look at the current financial crisis to know how rational we are.
posted by wastelands at 8:20 AM on January 7, 2009
stbalbach, I agree. Markets are just a reflect of human trading behavior, and so they're only as rational the beings underlying that behavior. One only needs to look at the current financial crisis to know how rational we are.
posted by wastelands at 8:20 AM on January 7, 2009
Where the hell is Winston Smith when you need him.
[Spoiler] Getting his face eaten off by rats?
posted by inigo2 at 9:58 AM on January 7, 2009 [1 favorite]
[Spoiler] Getting his face eaten off by rats?
posted by inigo2 at 9:58 AM on January 7, 2009 [1 favorite]
An interesting piece by Malcolm Gladwell.
It was interesting, thanks.
Also interesting, is Taleb's website, where he says:
"...treatments like the one by Malcolm Gladwell in the New Yorker, while flattering, put me in the wrong box --too much emphasis on the far less interesting, more limited –and rather boring --applications of my ideas to finance/economics, & less on the dynamics of historical events/philosophy of history, artistic success, technological luck, and general uncertainty in society. Please stop writing to me about it: it does not represent me. Finance is for philistines!"
posted by inigo2 at 10:25 AM on January 7, 2009 [1 favorite]
It was interesting, thanks.
Also interesting, is Taleb's website, where he says:
"...treatments like the one by Malcolm Gladwell in the New Yorker, while flattering, put me in the wrong box --too much emphasis on the far less interesting, more limited –and rather boring --applications of my ideas to finance/economics, & less on the dynamics of historical events/philosophy of history, artistic success, technological luck, and general uncertainty in society. Please stop writing to me about it: it does not represent me. Finance is for philistines!"
posted by inigo2 at 10:25 AM on January 7, 2009 [1 favorite]
An interesting piece by Malcolm Gladwell.
Also, a map of the Fourth Quandrant (or "Here there be black swans")
posted by 445supermag at 10:59 AM on January 7, 2009
Also, a map of the Fourth Quandrant (or "Here there be black swans")
posted by 445supermag at 10:59 AM on January 7, 2009
Hello all, writing from Rome here.
Chances of italy leaving the eurozone = 0. As skeptic said, the "threats" were really just second rate politicians blabbering about stuff they cannot comprehend.
Not to mention the fact that if it were to happen it would take much more than a year just to organize the switchover.
I can see the S&P at 500 (and would actually bet on retesting the recent lows), but crude at $25? All it takes to for it to rally $10 is two iranian guys on a windsurf throwing darts at a navy boat..
I'd love to see AUDJPY at 40 so I can buy more. Considering the RBA has been intervening with the Aussie dollar at .60, that would imply USDJPY at 66, which is below the lowest forecast I've heard, and definitely a level before which the BOJ would intervene..
You want a financial black swan? Here it is..
posted by 3mendo at 11:56 AM on January 7, 2009
Chances of italy leaving the eurozone = 0. As skeptic said, the "threats" were really just second rate politicians blabbering about stuff they cannot comprehend.
Not to mention the fact that if it were to happen it would take much more than a year just to organize the switchover.
I can see the S&P at 500 (and would actually bet on retesting the recent lows), but crude at $25? All it takes to for it to rally $10 is two iranian guys on a windsurf throwing darts at a navy boat..
I'd love to see AUDJPY at 40 so I can buy more. Considering the RBA has been intervening with the Aussie dollar at .60, that would imply USDJPY at 66, which is below the lowest forecast I've heard, and definitely a level before which the BOJ would intervene..
You want a financial black swan? Here it is..
posted by 3mendo at 11:56 AM on January 7, 2009
Skynet appointed CEO of GM. Share price actually rises.
posted by ROU_Xenophobe at 7:25 AM on January 7
No spoilers please.
posted by mecran01 at 12:11 PM on January 7, 2009 [1 favorite]
posted by ROU_Xenophobe at 7:25 AM on January 7
No spoilers please.
posted by mecran01 at 12:11 PM on January 7, 2009 [1 favorite]
Not extreme enough to be true "black swans", can just we call these predictions either:
(1) Grey Swans
(2) Brown Swans
(3) Black Geese
(4) Ugly Ducklings
(5) Passenger Pigeons
posted by wendell at 1:03 PM on January 7, 2009
(1) Grey Swans
(2) Brown Swans
(3) Black Geese
(4) Ugly Ducklings
(5) Passenger Pigeons
posted by wendell at 1:03 PM on January 7, 2009
(6) Duck Tales
posted by Stylus Happenstance at 2:17 PM on January 7, 2009 [1 favorite]
posted by Stylus Happenstance at 2:17 PM on January 7, 2009 [1 favorite]
None of those are black swans, a lot of those are completely plausible with known impacts. You know what was the black swan this year?
Bernie Madoff.
posted by amuseDetachment at 10:21 AM on January 8, 2009 [1 favorite]
Bernie Madoff.
posted by amuseDetachment at 10:21 AM on January 8, 2009 [1 favorite]
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Saxo Bank's Outrageous Predictions for 2008
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2. S&P 500 falls 25% from its 2007 high to 1182.
Outrageous, I say!
posted by Rhaomi at 2:59 AM on January 7, 2009