Flying black swans

Consumers are under attack from a number of black swans including the potential for Ireland and Greece to default, the RBA to raise interest rates and the continuing great new tax debates.

Investors are spooked by the recurrence of the Greek debt crisis and the contagion to Portugal and Spain, the continuing high levels of unemployment and debt to GDP ratios and the reactions to austerity measures in the UK and USA.

The steady decline in the stock market, the cattle to Indonesia and the unprecedented defeat of the Government in both houses over Malaysia are all adding to concerns that the RBA is going to rush through at least two more mortgage rate increases this year because the miners have never had it so good. The release of the pricing policy for carbon is of course the biggest black swan event to come.

“Roy Morgan Consumer Confidence has fallen for the fourth week out of the last five – down 5.5pts to 108.3 – its lowest point in more than two years, since May 30/31, 2009.”

Confidence fell across all components, however the steepest falls related to family finances with 25% (down 5%) of Australians saying their family is “better off financially” than this time last year and 33% (down 4%) saying they expect their family to be “better off financially” this time next year. Both are now at their lowest since mid 2009 during the GFC.

Currently the world’s financial press is reacting to the wipe off of literally billions of dollars of equity value, continued security blanked purchases of gold, the crisis for Big Pharma with 20 of their best products becoming generics in the next year, a gap between West Texas and Brent Oil prices, collapse of unity of the OPEC oil producers and massive insurance premium increases from the unprecedented run of environmental disasters. This is seen as meeting many of the black swan conditions.

Mark Spitznagel, who runs a management fund (Universa) that helps its clients brace for the worst potential market scenarios by purchasing options and other forms of insurance against downturns, argues in a June 13 paper that today’s stock valuations, put in the context of 110 years of stock-market history, are poised for a deep decline. This fund is known as the Black Swan Fund.

The Black Swan Theory was developed by Nassim Nicholas Taleb as a metaphor that encapsulates the concept that, “The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalised by hindsight”.

The theory seeks to explain:

• The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology.
• The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
• The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.

Gary Morgan points out: “With consumer confidence at such a low ebb, any discussion about increasing interest rates is likely to scare Australians even more. In addition, there is no indication consumers ‘inflation expectations’ have increased this year – the Melbourne Institute Inflation Expectations have dropped from 4.6% in January to 3.3% in May; ABS CPI figures show inflation of 3.3% in the March Quarter .

The Australian economy is suffering from its success rather than being in the situation of the Northern hemisphere nations, but consumers are looking for firm leadership and belief that they will get some share of the wealth that Glenn Stevens assures them will trickle down to them

Despite all this flight of the black swans, smart companies will recognise the need to plan for growth, reduce stocks that are not covering forward orders, train and retain good staff and go back to key customers who have good track records.

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Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.