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'Black Swan' Taleb Warns “Calm Before The Storm”

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'Black Swan' Taleb Warns “Calm Before The Storm”

- Is the apparent calm of the West a signal of latent instability?
- Increasing symptoms of instability in West as proposed by Nassim Taleb
- Wider public and mainstream press believe “experts” have everything under control
- Black Swan approaches and we may be experiencing “the calm before the storm”

 nicholas_taleb

Western countries are increasingly displaying symptoms of instability as described by Nassim Taleb, the author of the The Black Swan, ever since the publication of an essay written with Gregory Treverton entitled “The Calm Before the Storm.”

The piece was published in the January/February edition of Foreign Affairs - the official magazine of the Council on Foreign Relations.

In their essay, Taleb and Treverton highlight five characteristics that could help identify states that - while appearing stable on the surface - may actually be quite fragile.

“Fragility”, they write, “is aversion to disorder”. Under this criterion they view Italy as a stable state.

The five characteristics they view as major factors in instability are:

- centralised decision making,

- lack of economic diversity

- high levels of debt and leverage

- absence of political variability

- lack of track record in surviving shocks

“Italy, paradoxically, shows no signs of fragility. It is effectively decentralized and has bounced back from perennial political crises. It also experiences a great deal of harmless political variability, cycling through 14 prime ministerial terms in the past 25 years.”

With regards to centralised decision making the article points to the autocratic Arab states which while appearing strong on the surface quickly succumbed to the “Arab Spring” uprisings before degenerating into chaos - albeit compounded by external influences.

“Although centralization reduces deviations from the norm, making things appear to run more smoothly, it magnifies the consequences of those deviations that do occur. It concentrates turmoil in fewer but more severe episodes, which are disproportionately more harmful than cumulative small variations.

In other words, centralization decreases local risks, such as provincial barons pocketing public funds, at the price of increasing systemic risks, such as disastrous national-level reforms.”

“On the other hand, Switzerland - often viewed as a model of stability -is composed of multiple smaller semi-autonomous states.”

Other states they look at are Middle Eastern, African and China.

Recent events would suggest that EU is increasingly centralising authority and decision making in Brussels. Indeed, Greek Prime Minister Alexis Tsipras recently stated that Greece’s creditors had made it clear that bailed-out countries had no right to self determination.

In terms of economic diversity, the authors warn of the risks associated with over-reliance on a particular sector such as tourism and on a single commodity or industry. The cite Botswana’s over-reliance on the diamond trade and Japan’s car manufacturing sector.

Over-reliance on any sector has obvious implications. “Specialization makes a state more vulnerable in the face of random events.”

An African country that is completely reliant on cocoa production, for example, is vulnerable to the predations of large confectionary corporations who can demand unreasonably low prices leading to hardship, poverty and civil unrest.

The U.S. is slightly vulnerable in this regard having relocated the bulk of its manufacturing sector overseas in recent years although it remains well diversified.

The entire western world is incredibly vulnerable to the third factor - over-indebtedness - which is described as “the single most critical source of fragility.”

Since the 2008 crisis - caused by excessive debt -  global debt has increased by one third. In May the McKinsey Institute reported that total global debt was now around $199 trillion - $27,204 for every person alive today.

The U.S. is particularly vulnerable in this regard. It’s total Federal debt is over $18 trillion while its GDP is estimated to be $17.71 trillion. At the same time its unfunded liabilities are estimated to be a more than a staggering $100 trillion - a sure source of instability as these payments come due.

According to the authors, political variability contributes to stability “by responding to pressures in the body politic”. While western leaders like to promote the notion of political pluralism it is clear from the consistently low levels of participation of voters at election time that the people who live with the consequences of their decisions that the public do not generally see credible alternatives.

It becomes increasingly apparent that decisions are made by lobby groups and vested interests only to be rubber stamped by governments of varying persuasions.

How the fifth characteristic pertains to the western world is more difficult to identify.

What constitutes a major shock and what constitutes a survival of a shock? Can the Western world be said to have experienced a major shock in the post war period prior to the 2008 crisis? Can they be said to have survived that shock when in reality they appear to be on life-support? It is true that the powers that be have done a remarkable job at averting the day of reckoning but does that constitute a track record of surviving shocks?

The authors believe that exposure to any one of these factors is a symptom of instability. They add that exposure to multiple factors presents an exponential increase in risk.

The wider public and the press seem unjustifiably complacent at this time. It seems likely that the seemingly unending “recovery” is simply the calm before the storm.

The article in Foreign Affairs can be read here

Must read guide:  7 Key Gold Must Haves

 

MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,115.75, EUR 1,047.58 and GBP 739.09 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,153.20, EUR 1,046.89 and GBP 745.27 per ounce.

goldcore_gold_chart_eur_15-07-2015
Gold in EUR - 1 Year

Yesterday, gold fell $2.70 to $1,155.20 an ounce and silver slipped $0.12 to $15.38 an ounce. Gold in Singapore for immediate delivery traded sideways as did gold in Switzerland.

Silver for immediate delivery was 0.2 percent lower at $15.41 an ounce, dropping for a third day. Spot platinum climbed 0.5 percent to $1,031.51 an ounce, while palladium advanced 0.6 percent to $656.95 an ounce.

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Thu, 07/16/2015 - 10:44 | 6319398 Comte d'herblay
Comte d'herblay's picture

They are only "predictable" in the sense that a stopped clock is right twice a day (if you are not on a 24 hour timepiece).

Predictability should have some solid underpinnings for an event to be labeled as such. Otherwise the guess is about as useful for making money as a warehouse full of  TRS-80 computers.

Wed, 07/15/2015 - 15:23 | 6316479 ebear
ebear's picture

"It is beyond control or prediction or quantification."

Plenty of things fit in that category without being black swans.

By Taleb's definition, a Black Swan is an event that can't be predicted because of a logical fallacy in the method of analysis:

"All I have seen is A, therefore all is A."

That's very different from "all I have seen is A, therefore the probability that all is A is considered high, until new data arrives.

The idiot public operates on the first principle, therefore their world is filled with black swans.

Any scientist worth his salt operates on the second principle. If your basic premise is "appearances can be deceptive" then there really are no black swans, only disproved hypotheses.

Since economics is an ad hoc jumble of unproven theories vigorously defended by vested interests (similar to the state of science in the 19th century) you can expect more than a few black swans to appear in their camp. That doesn't make them unpredictable in a general sense though, but merely to their voodoo practitioners.

I saw Taleb interviewed on a financial program shortly after the book came out, in which the interviewer (some money honey) asked him when he thought the next Black Swan would appear. I felt sorry for the guy, but I guess that's what happens when you parade your theory in front of an unsophisticated audience.

IMO, Taleb's book serves no useful purpose in finance or economics because those people are already committed to a doctrine (whatever works for them at the moment) and simply aren't going to absorb its major point. Frankly, Taleb ought to know better.

Taleb should be required reading in an introductory course on epistemology, along with Thomas Khun and of course, Karl Popper. Other than that, it's old hat to those who work in the field.

Wed, 07/15/2015 - 16:09 | 6316759 Doña K
Doña K's picture

The black swan may be the fact that there is no more money/debt that can be spent by the masses which is as high as 75% of GDP.

Once that strain reaches its elastic limit and yield point, rupture is a NY minute away.

https://www.google.com/search?q=stress+and+strain+elastic+limit&rlz=1C1C...

 

Wed, 07/15/2015 - 15:59 | 6316718 cdm
cdm's picture

 

to be sure, Mr. Taleb (with purpose ...) does not write for the finance nor

econ spaces ... so there is no "ought to know better" in this case ...

it would not be far from the truth to say that he writes his material

without regard to whether or not it will be packaged and sold as a book.

 

in addition to the required reading you mention, if you consume

ANY twitter streams, then you MUST track Mr. Taleb there ...

 

https://twitter.com/nntaleb

 

go well,

cdm

Thu, 07/16/2015 - 01:24 | 6318456 ebear
ebear's picture

"to be sure, Mr. Taleb (with purpose ...) does not write for the finance nor

econ spaces ... so there is no "ought to know better" in this case ..."

Well, OK, I'll retract the statement, but he did appear on a financial program, so there's that. Maybe he just didn't know what he was stepping into.

Wed, 07/15/2015 - 13:49 | 6316113 d4pwnage
d4pwnage's picture

Nobody for President--Leadership you can trust! :)

Thu, 07/16/2015 - 02:07 | 6318497 w a l k - a w a y
w a l k - a w a y's picture

 

 

The Zeroastrian Creed

Nothing is sacred.
Nothing makes sense.
Nothing lasts forever.
Nothing works like magic.
Nothing contains no harmful additives.
Nothing gets out those impossible stains.
Nothing is known to cure baldness.
Nothing beats sex.
-- Swami Beyondananda

Thu, 07/16/2015 - 10:01 | 6319271 Afaerl
Afaerl's picture

There's nothing so over-rated as sex, and nothing so under-rated as a good crap.

Thu, 07/16/2015 - 14:07 | 6320167 Jumbotron
Jumbotron's picture

Sex is only temporary and can leave you with a nasty leftover that....oozes shall we say.  Or crys and begs for the car and a college education and then comes back home and plays video games in the basement.

But a good crap.....cleanses the body and the soul.

Yep...I would have to agree.

Wed, 07/15/2015 - 10:48 | 6315220 marathonman
marathonman's picture

Bring on the sovereign debt crisis and we'll see how stable this US hoopty is.

Wed, 07/15/2015 - 12:01 | 6315564 Solio
Solio's picture

The U.S. has been in crisis mode since  the loss of Glass-Steagall protections then year 2000 when the SC subverted the voting process and made their installation into the oval office.

Also, 9/11, 3/11/11, abolishing of contract law, the elevation of fraud to religious status, and so on.

Wed, 07/15/2015 - 18:43 | 6317333 ILLILLILLI
ILLILLILLI's picture

The whole FAS 157 thing needs to be revisited, too. As long as assets can be "marked-to-magical", nothing will get straightened out.

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