Black Swans and the events that shake the markets
The apparently random events that shake the markets will become more frequent, says a U.S. advisory that is happy to hold gold stocks.
We see many swans during the course of the summer and not one of them has ever been black.
But black swans have been wreaking havoc on the world’s markets.
In this case, a “black swan” is an event as rare as the sighting of a charcoal-coloured swan in real life.
It might be a cloud of volcanic ash from Iceland, or a massive eruption of oil in the Gulf of Mexico. But could it also be an earth-shattering debt crisis in Greece?
We’ll get an informed view on that question from Dr. Hans P. Black, editor of Review & Outlook. This advisory from a Boston money management firm regularly takes a broad view of the world’s markets.
And in this issue, Dr. Black refers to Dr. Nassim Nicholas Taleb, the author of two books that seem particularly resonant today — The Black Swan: The Impact of the Highly Improbable, and Fooled by Randomness: The Hidden Role of Chance in Life and the Markets.
Before we take that random walk in the markets, we will pause, as we normally do with this advisory, to get an update on its gold stocks. It continues to hold four, including two from Canada.
An alternative currency
With the looming problems of sovereign debt in Europe, gold bullion prices had been rising when this issue went to press. The price has skidded wildly over the past two days. The advisory anticipated the possibility of price corrections, but is convinced that investors are widely embracing “the traditional safety of gold bullion.”
“Gold, as we have stated many times before, is acting as an alternative currency and not as a commodity.”
It considers its largest holding, Newmont Mining (NYSE-NEM), “very undervalued” given its recent results and strong cash flows. Newmont opened today at $58.05 (about $6 above its price a month ago) and yields 0.7 per cent on its 40-cent dividend.
The advisory has been re-accumulating Canada’s IAMGOLD (TSX-IMG) after it dropped from its highs of last fall. It opened at $19.94 ($4 higher than a month ago and not far from its November peak). The stock yields 0.3 per cent on its modest $0.06 dividend.
The advisory still likes its two favourite smaller producers, “both of which have shown very good price movement this month.” Canada’s Orvana Minerals Corp. (TSX-ORV) has moved some 23 cents, to $1.36. Australia’s Intrepid Mines (TSX/ASX-IAU) traded at $0.32 a month ago and is now at $0.43. Neither pays a dividend.
Great timing!
It is almost exactly three years since Dr. Talib’s Black Swan book was published, says Dr. Black — and “black swans abound.”
First there was a rare natural event, the volcanic eruption in Iceland. “The cumulative effect on air travel has been greater than September 11th,” notes the author.
The eventual price tag will be enormous. There are, of course, plenty of stories of stranded travelers. Dr. Black tells of one friend who took the train from St. Petersburg to Warsaw to Frankfurt to Paris to Madrid.
The strangest financial story is almost a “black swan” in itself. Just months prior to the eruption, British Airways had drastically reduced its business interruption insurance. “Great timing indeed!” says the author.
A Big Black Swan
Then there was a not-quite-natural disaster, the vast oil spill in the Gulf of Mexico. This may have been less improbable than the volcano, admits Dr. Black, but “the immensity of it will be discussed for years.”
It has already caused Governor Arnold Schwarzenegger of California to back away from offshore drilling in his state. And some say it will make Alberta’s oil sands seem more attractive than deep-water drilling sites.
But what are we to make of the crisis that has been rocking the markets? Is the Greek debt crisis a random event, or just an all-too-human mess that could have been avoided?
However you look at it, it is still improbable, says the author. “This comparatively small country will need to receive an amount equal to 20% of the bank bailout package put together by U.S. lawmakers in 2008.”
He puts things in even sharper focus. A country with less than 1 per cent of the world’s GDP suddenly needs a bailout package equal to 50 per cent of its outstanding debt.
Greek public debt is now estimated to be 108 per cent of its gross domestic product and will top 149 per cent by 2013, the year the bailout loans come due. At an interest rate of some 6 per cent, that means 25 per cent of Greece’s tax revenues will go straight to foreign bondholders.
Many other numbers could be invoked to underline this financial horror story. And we have already seen how it can shake world markets. Yet this story may become even more disturbing.
More on the way
There are more “black swans” on the way, warns Dr. Black. All across Europe, the situation is deteriorating.
Spain and Portugal have often been mentioned as the next basket cases, but “the countries of the former Eastern European block are all bordering on bankruptcy, and will likely severely test the economic and political will of core Europe.” This author believes the euro will be saved for now, but that the problem will continue to recur in different forms.
“Unfortunately, these Black Swans are going to become more frequent and likely pop up with little notice as we move further through this historic period of financial dislocation.”
In short, random and unpredictable events are liable to start occurring like clockwork. But they will still be hard to foresee.
“The Black Swans will be born out of a combination of surprise and the rapidity of a sequence of events,” concludes Dr. Black. As they do, battered investors are sure to seek out even greater safety.
Gold, anyone?
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