BLACK SWANS

 

The proverbial Black Swan event, made famous by Nassim Taleb's book of that name, is a game changing event nobody expects.  Talib's point was though each event is a rarity, and difficult to predict, these events as a group are common enough that one ought to invest in preparation for their occurence.  

Even if the hedge is small, it can save a portfolio.  Optimally the hedge should be correlated somewhat to the event, but at least it must be uncorollated to the rest of the market that will suffer.

Credit Default Swaps were the hedge that made you fabulously wealthy during the real estate crash.

Puts on the Q's would have made you a bundle during the dot com crash.

Both those Black Swans were predicted by a small but vocal group who did get very rich.

The Covid Crash, was so badly handled by a goverment that tried to deny its reality - until the economy had collapsed that nobody could hedge/profit in the short run. But those who simply assumed that the Government response would and will be Trillions in bailouts to the banks, the overindebted corporations and a bloated and undercapitalized debt system as a whole, would have been well compensated over time in buying inflation hedges.

Because there is only one government response possible now in this system we pretend is capitlalist but has really been a Capitalist/Socialist hybrid since the creation of a Central Bank (the engine of socialism).  And that response is to inflate away debt/liquidity problems with bailouts, debt forgiveness (in the form of the Fed simply buying the bad debt with printed money) and stimulus.

So what are the possible Black Swan Events currently on the horizon that will necessitate another round of Bailouts, debt forgiveness and stimulus?

A) The war between Russia (backed by China, India and the Gulf States and Iran) vs Ukraine (Backed by the US, Europe and some of the ex-Eastern Block.)  This war is way to complex to analyze here.  But the portential for it to matastasize into something larger, more costly, and more devastating to the global economy is not inconsiderable.  The disruption to the food and energy markets alone could be catastrophic.

B) The introduction of a competing currency to settle the commodity trade by China/Russia/India and the Gulf States.  This is conisdered a done deal by Money Managers as briliant as Felix Zulauf, Simon Hunt, Alasdair MaCleod and many others.  It is only the timing that is in question.  This will make the dollar plunge in value; and thus all commodities and all debt priced in dollars will become unbearably expensive.

C) A liquidity crisis brought on by higher rates.  This could emanate from anywhere as there are so many Zombie and badly overextended Corporations, Municipalities, even entire States - across the globe.  And cross-collateralization is complex, rampant, and impossible to anticipate.

D) An unforced potitical error of epic stupidity like the refusal to pay US debts that have already been incurred as the debt ceiling deadline looms

E) Another pandemic.  Why not?  The impulse to deny its existence at least here in thre US is more poweful than ever.

F) A single bad trade with epic cross collateralization implications.  It's happend before, for example to Nick Leason a little trader in the Singapore office of Barrings Bank which destroyed that bank and had counterparty repercussion throughout the banking system.  And then of course there was Long Term Capital Management fiasco which provoked the first of the Great Bailouts.  Now with an unregulated derivative market in the Quadrillions of Dollars, a disasterous bad trade is more likely than ever;

G) The oil market blowing out to 150 - 200 dollars per barrel.  The implication for inflation would be devastating.

H) Something we haven't even considered.  That's the true nature of the Black Swan, after all.

SO - how do you hedge these things?

Each one individually probably has a good hedging strategy,  but if you want to hedge the ensuing fallout from the next round of bailouts, buy ins, and stimulus, I say Hard Assets is the best way to go.