Is Coronavirus A New Black Swan for The Global Economy?
Nassim Nicholas Taleb, best-selling author and Distinguished Professor of Risk Engineering and Co-Director of the Research Centre for Risk Engineering at the Polytechnic Institute of New York University is on the news, once again. Everyone is asking the question: Is Coronavirus the 2020 Black Swan for the Global Economy?
Nassim Taleb coined the phrase black swan, explaining that it is a metaphor describing how people deal with unpredictable events. This term became very popular with the release of his novel “The Black Swan”.
As Taleb has noted, a black swan describes an extremely rare occurrence of an event that comes with severe consequences. Though it cannot be predicted beforehand, there would be many who would claim it would have been predictable after the fact.
Past Black Swan Events
Black swan events can cause major economic damage at any point in time. As these events cannot be predicted, the only way to possible prepare for the disruptive event would be to build robust systems in advance. There is a false belief that standardized tools used to measure the probability of failure will prevent a black swan event to the point these tools would offer a false sense of security.
Taleb argued the very reason that black swan events are unpredictable due to their rarity, is the reason people must always assume there is a real possibility of a black swan event coming so businesses must plan accordingly. That is why Taleb wrote another best-selling book to help people, businesses and organizations to prepare for Black Swans: Antifragile: Things that Gain from Disorder. In Antifragile, Taleb provides a guide of how to go beyond being resilient or robust. An Antifragile organization will not only survive a black swan, but will emerge even stronger from it.
A recent example of a black swan event would be the U.S. housing market financial crash of 2008. The effects of this event affected most countries and was catastrophic on a global scale. There were actually only a few outliers who noted a similar financial disaster would be coming. But even them couldn’t imagine the deep impact it would have on the global economy.
2008 was also the year Zimbabwe was suffering from the worst case of hyperinflation. It saw a peak rate of inflation of 79.6 billion percent. This inflation occurrence is near impossible to predict and of course could ruin a country financially.
A look further back shows the dotcom bubble in 2001 as a black swan event. It had a similar outcome as the 2008 financial crisis but narrowed to the tech sector. It brought down many investment funds after suffering inflated valuations with no market traction to account for.
Understanding Black Swan Events
While it would be natural to associate black swan events with a negative connotation, this is not recommended. Black swan events could be viewed as positive or negative events depending on the perspective of the individual. Black swan events can bring massive opportunities to those that know how to profit from them.
For instance, if the stock market has a disastrous day, an investor would see this day as a positive event to exercise short options. On the other hand, this would be seen as a negative event for an investor who bought heavily into the market.
Would the Coronavirus be considered as a Black Swan event?
The coronavirus is a rare event that has dramatically affected the global economy, society and short-term daily activity. To meet the terms of a black swan event, the coronavirus must create chaos in the short term and because of that has driven major change to the aforementioned global economies etc.
In short, it seems like we could certainly consider the novel Coronavirus a black swan event. While there were outliers who did predict a pandemic, none knew of the scale of impact foreseen in such a short period of time. So, does it meet all the criteria to be considered as a black swan?
However, according to Nassim Nicholas Taleb, author of the Black Swan: No, the Coronavirus pandemic is NOT a Black Swan. Even in his book, which was written in 2007, Nassim wrote:
As we travel more on this planet, epidemics will be more acute — we will have a germ population dominated by a few numbers, and the successful killer will spread vastly more effectively. I see risks of a very strange acute virus spreading throughout the planet.
More recently, Nassim has commented on the topic and said he would consider the coronavirus pandemic as a White swan – an event which we knew would happen eventually, and it was almost inevitable. He has reminded the world that even President George Bush warned US to prepare for a pandemic back in 2005. Even Bill Gates famously gave a TED speech titled “The Next Outbreak? We are not ready” back in 2015:
Economic impacts of Coronavirus (COVID-19)
Working on the assumption that the viral outbreak may hit pandemic levels (40%-70% global population infected), economies are facing a grim short-term outlook. Hundreds of thousands of flight cancellations means significant losses to the travel and leisure industries. Cancelled conferences and major sporting events (or events played without fans in attendance) are only the tip of an ever-growing iceberg as time goes on.
We are only at the tipping point of the “avoidance affects”. Avoidance behavior generally refers to people choosing to stay home more, cancel flights, meetings, dinners out etc. To that effect, travel on public transit in some areas has decreased up to 85% (due in part to business shutdowns as well). Auto (big ticket) and Store (small ticket) purchases are down as people are avoiding public gathering spaces.
While the impact on global economies is increasingly severe in all the affected areas, in some ways, there are still positive outcomes that are occurring. China’s shutdown of their industrial sector in Wuhan for example resulted in the cleanest air quality index in years.
The plain truth of the stock market is that it cannot sustain continued growth always. There will be times the market will need a course correction. The markets deflation occurring during a strong economic run may actually reduce the impact or long-term severity of a recession.
Whether positive or negative, the coronavirus is less of a medical pandemic as it is an economic pandemic. Even though the total number of cases and the death toll looks scary, the percentage of death on infected people is not far from a common flu. However, the most recent fall of the stock market was the worst seen since the 2008 financial crisis.
Looking for a keynote speaker on Coronavirus and its economic effects
More than anything else, what is needed as an economic mitigation to the downturn, is to listen to those who can prevent market mass hysteria by keeping facts in check against fears of the market.
If ever there was a more poignant time to discuss significantly impactful events that are affecting us all today, Nassim Taleb and his discussion on black swan events would greatly impact your engagement with his keynote speech.
Author, esteemed academic and builder of rules for decision-making on how to live in a world we don’t understand, Nassim Taleb’s oration is perfect timing to provide your guests with quantifiable and engaging economic insights. Contact us for his fees and availability to speak at your next event.