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Presenting SocGen's 5 Black Swans For 2016
If you’re the type who likes black swans this has been the month for you.
On the political front, Portugal’s Socialists, led by Antonio Costa, formed an alliance with the Left Bloc and the Communists on the way to overthrowing the Passos Coelho government and presaging a repudiation of Berlin’s brand of fiscal rectitude. This throws the country’s austerity program into doubt and sets up not only a confrontation with the troika, but also the potential loss of access to ECB QE should a deteriorating fiscal situation prompt a DBRS downgrade.
In Spain, Catalonia is in the midst of a secession bid which, depending on Catalan political infighting and how far Rajoy wants to push things ahead of national elections set for next month, could see a fifth of Spain’s GDP separate, causing Spanish debt-to-GDP to jump by some 25%.
As far as geopolitics goes, ISIS Sinai downed a Russian passenger plane killing all 224 people on board and then, not even two weeks later, ISIS proper waged war in the streets of Paris killing 130 people. As if those two bombshells weren’t enough, Turkey decided to shoot down a Russian fighter jet this morning.
Finally, 12 month forwards for the Saudi riyal seem to indicate that the market believes the three decade-old dollar peg is about to fall under pressure from slumping crude and falling FX reserves. BofAML calls the possibility of a Saudi depeg the “number one black swan event for the global oil market in 2016.”
And those are just the black swans that have landed in the last 30 days.
In its latest quarterly Global Economic Outlook, SocGen takes a look at five political and economic black swans that could touch down in 2016 and also warns that “high levels of public sector debt, already overburdened monetary policy, still high debt stocks and on-going balance sheet clean ups in a number of economies leave the global economy will a low level of ammunition to deal with new shocks."
Here's the latest SG "swan chart" which is “dominated by downside risks”:
As we and a bevy of others have pointed out, QE is bumping up against the law of diminishing returns and it’s no longer clear that doubling and tripling down on monetization will do anything at all to boost aggregate demand, juice global trade, or raise inflation expectations (but what it surely will do is continue to inflate asset bubbles). In this environment, fiscal stimulus may be the only “solution.” As SocGen puts it, “in the event of a major new significant shock, our baseline scenario remains that both the US and Europe would opt first for further monetary policy stimulus. Later on, however, as this proves inefficient, we would expect fiscal stimulus to be considered.” China, of course, has already gone this route, boosting fiscal spending by 36% in Ocotber as the country's credit impulse disappeared despite six rate cuts in less than a year.
If the Willem Buiters of the world have their way, governments will simply print debt for the sole purpose of providing central banks with something to monetize which means that in the final analysis, we could end up in the absolutely absurd perdicament of printing one liability (bonds) only to turn around and buy them from ourselves with another liability that we also print (fiat money).
In any event, below is SocGen's rundown of the swans shown in the graphic.
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From SocGen
Brexit at a probability of 45%, remains our highest probability risk. At this time, a date has yet to be set for the referendum but 3Q16 seems a likely timing, based on the idea that Prime Minister Cameron will want to hold the referendum within a reasonable timeframe on concluding an agreement with his EU partners (which could come as early as the December 2015 Summit, but more likely in March 2016).
China hard landing remains a significant risk at 30%. Medium-term, we set an even higher probability of 40% on a lost decade scenario. As opposed to a hard landing, however, such a risk scenario would manifest itself only gradually. The most likely trigger for a China hard- landing is policy error with miscalculation of how much financial risk management or structural reform the system can absorb. We identify three main triggers. In practice, a combination thereof seems the most likely cause of such a risk scenario.
- Credit crunch: An intensification of capital outflows, a growing number of non-performing loans and an insufficient response from the PBoC could result in a credit crunch. Such risks could be further exacerbated by pressure coming from Chinese corporations’ foreign exchange denominated debt and overall high level of leverage.
- Dry-up in housing demand: Should a new housing shock emerge, triggering a buyers strike, then real estate developers (also burdened with foreign currency loans) could suffer renewed stress, triggering a significant scaling back of investment.
- Capacity overhang: The still-large excess capacity in the manufacturing sector would be further exacerbated in such a scenario, weighing on corporate margins and profits. The risk is to see bankruptcies and unemployment increase in such a bleak scenario.
China hard landing and/or a renewed EM crisis are both potential triggers for a shock that could trigger global recession (10% probability).
Consumers hold the key to recovery in the advanced economies. We place a 25% probability on the risk that consumers in the advanced economies save more of the gains in real disposable income than we expect.
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As for the risk that the "Fed hikes to late", we encourage you to review "The Fed Has Made A "Policy Mistake" And The Inevtiable Result Will Be A Recession", wherein we review BNP's contention that the FOMC has missed its window to hike and has thereby set the US up for a recession once unemployment (which will likely undershoot) invariably snaps back.
So as you think about 2016, you can add China hard landing (of course that's already happened, but we suppose it could always get harder-er-er), Brexit, a global recession, and lackluster consumer spending to your black swan list which should already include World War III.
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Where is the black swan of thermonuclear war?
Russian Defense Ministry Video Proves Su-24 Never Entered Turkish Airspace
http://sputniknews.com/military/20151124/1030695406/mod-su-24-flight-pat...
Exactly right JO.
The black swan already happend while everyone slept, and these idiots are talking about China hard landing, US consumer saving and Brexit.
Enjoy your posts by the way, many thanks.
Thanks. Wishing you the best.
Why don't you two get a room?
And don't forget the condom. Don't end up like Charlie Sheen.....
Correct, markets were nervous today as Europe understood the severity of the situation but the braindead Wall St uber bulls went batshit crazy full on buy mode.
Brexit, what the fuck would that cause as the UK isn't in the Euro anyway. Frexit may be different though if Le Pen gets in but thats 2017.
I think the black Turkey just arrived today.
10% on EM?? I will take the over on that...the .25 point pop in interest rates will bury the EM's dollar denominated debt....Ohhhh and a few more shoot downs over/around Turkey and the TLira will tading 1/1000000USD....Have a nice day
I guess we wouldn't call nuclear holocaust a Black Swan , right ?
Right
A Global Thermonuclear Holocaust is called.....
Sound and Lights
Obama says the coming Global Climate Summit will be a major blow to ISIS
http://www.climatedepot.com/2015/11/24/obama-says-paris-climate-conferen...
No Black Swans here..... Just dumb decisions
Biggest Black Swan is another year of this shit
Surprise!
No more worries about the Yellowstone mega swarms? or polar vortices?
OR Hillary fucken Clintons latest scandle?
"If you’re the type who likes black swans this has been the month for you"
This is a bit more of a softy-unicorny definition of black swan, me thinks. This month is more of the shit bombs from the flock of black swans.
If you can think of it, and it might happen then it is not a Black Swan. A Black Swan is totally unexpected, not on the radar, inconceivable.
That's right. A real black swan would go something like this:
A guy goes shopping at the local mall. On the way he decides he has to take a piss so he pulls into a back alley... the one where he usually takes a piss without incident. But this time there is a stranger parked in his spot. So he honks the horn and tells the guy to fuck off. The guy pulls out a gun and starts shooting. Our hero, not to be chased off, returns fire and shoots the guy's dick off. Turns out the now-dickless intruder was a friendly visitor from Russia, nephew of Roman Abramovich.
Abramovich hears about his nephew's troubles and chooses to fly to the US to pick up his nephew (and a cousin) and take them home. On the way, one of the engines on Abramovich's plane sucks in a turkey and crashes into the side of the Eckles Building. Bankers are not happy now, and the Pentagon declares that Russia has launched a cruise missile (with 18 people aboard) directly into the Fed building in an attempt to break down the printing presses and break some computers, with intentions of dismantling the entire US monetary system. US military responds by sending a cruise missile into the rear window of Lavrov's limosine. Lavrov is uninjured because the driver had dropped him off in a back alley to take a piss. But Lavrov's dog and driver are killed. And now shit gets real, real fast.
Nobody saw that shit comin'. That's a black swan.
Well, now that you've thought of it and written it out for us, that ain't gonna happen.
I gotta wonder what's really going on in that alley, where all these guys have their dicks hangin' out.
Well everybody is shootin' everybody else's dicks off, so it's nothing sexual. Thank god. That would have brought religion into the equation, and nobody needs that.
Agreed on all points.
Bankers (in suits, I presume) assigning exact % probabilities to 'Black Swans' - oh the irony.
Black swans can't be foreseen. That's why they are called "black". This is just a list of foreseeable risks, kind of a waste of time. Here is what a black swan looks like:
Didn't see that one coming, did you!
damn you're good, i still don't see it.
Doh! I just logged the same observation. Carry on.
Black Swan?
One has been in the White House for seven years now.
Foreseen Disaster X Seven
that's no swan its a turkey
thats not a swan, thats a rodent
that's no swan, it's an islamo-fascist
no, my new name for it is the thin brown smoker
Ten bonus points for correctly identifying Obama a fascist, as opposed to what the fascist media would want - a "liberal" where his unpopular fascist acts could be blamed on "liberals" just as Bush's acts blamed on "conservatives"
ahhh, a critical thinker, I like you nanur
these aren't Black Swans, here's one, the US election gets brokered, delegates get passed around at the conventions, delegates walk out, third parties form and merge, tear gas in the streets, much bigger than Chicago 68, remember?
Europe has a summer of terror. More refugees, does anyone see this getting better? The UN is unable to act as the peace keeper in Syria. the Russians are ham handed, it's an impossible mess, which spills over into Lebanon and Israel and Gaza. The house of Saud teeters and falls. Dubai is a ghost town, scud missiles flying everywhere.
The global market pricing mechanism is broken. Oil is $20 a barrel and there is none. Gold is $500, same problem. The BIS can't do its job there is too much volatility in the currency markets, global trade stops. Even a one day exchange mechanism failure ripples through the economy. China has a political regime change, suddenly a new leader appears. Obama retreats to the WH, siege mentality. some talk of postponing the elections. Obama says he will run again. Bang bang pow, lots of people laying dead in the streets, just not the right ones. Violent overthrow of the USG mostly a made for TV event.
Run on the banks is thwarted by printing money. government begins overpaying its vendors, part of operation Inflation. Commercial sale of gold prohibited. Pot shops do gold bars under the counter. January 2017 Carly Fiorina becomes next president, surrounded by armed guards she puts Congress under house arrest. furloughs SCOTUS. nationalizes stock market. Janet Yellen become seretary of Treasury, delegates Fed to cabinet position. New IMF currency available only to large institutions. Dollar worthless. corporations corner remaining assets, land, gold, energy, using SDR.
The Thin Smoker is working overtime....chaos indeed.
Dont forget EBOLA!!!!!!
Silly me, I thought Black Swans were UNEXPECTED which would make this a list of events that would not be Black Swans.
This is not the Black Swan we are looking for move along.
Aside from a nuke I see nothing but increases in demand for everything.
"...consumers in the advanced economies save more of the gains in real disposable income than we expect."
Gains in real disposable income? Now that's funny!