And so the lake is getting more and more crowded. But whereas one swallow does not make summer, one black swan is enough to cause widespread panic and clear the whole swan lake. A sick swan having infected the rest, that describes the current situation on the stock markets.
Black swans do exist
With black swans Taleb meant unlikely but possible events that could have a significant impact on the economy and the financial markets and that can only be properly explained in hindsight. Various analysts have been keeping lists of potentials black swans for several years now. The analysts at Société Générale, for instance, include a ‘swan chart’ in their annual outlook. Last year their ‘black swans’ included a serious no-deal Brexit, a sharp market correction, and an escalation of the trade war between the US and China.
The point that Taleb was trying to make with his black swan, was that you cannot measure the consequences on the basis of a normal distribution: a small likelihood but a huge impact gives the distribution a huge ‘tail’. You actually need to cover yourself against these types of black swans and you cannot do that by just looking at the past.
And of course, that is where it went wrong in recent years: whatever black swan appeared in the lake, the monetary authorities took care of the problem. There was no need whatsoever for prudence.
And recently the Bank of International Settlements introduced its Green Swans. According to this bank-of-banks, green or climate swans have much in common with black swans. Climate-related risks are also very uncertain and complex, no certainty can be derived from the past and extreme effects can definitely not be ruled out.
But there are also some clear differences. You are much more likely to run into a green swan - the effects of climate change, for instance - than a black one. Another difference is that green swans are more dangerous than most black swans. Whereas the latter is mainly (according to Taleb’s definition) a threat to our financial system, a green swan can be a threat to all of humanity. Also, green swans are considerably more complex creatures than black swans. This is due not just to the complexity of the financial system, but also to the complex interaction between the economy (geopolitics), the ecosystem and social dynamics. Plenty of reasons for taking immediate measures, regardless of the exact scale and manifestation.
Swans can swim as much as they like, but as long as no one really takes any notice of them, they do not really matter. In recent years, that is what happened in the case of black swans, from Brexit to trade war. And the green swans, too, have failed to impress much so far.
But now that one of those black swans has made it onto dry land in China, feverish and breathless, it is becoming obvious that the other swans are not immune. And risk has suddenly become very relevant again. It looks as if all the swans are now trying to clamber ashore as quickly as possible, in order to get noticed.
And so the question remains: are there any white swans left that can calm things down a little?
Read other columns by Hans Stegeman