The markets have been kind so far in 2015 but a sense of vulnerability is keeping the giddiness at bay. Playing to these fears, State Street Global Advisors has come up with 10 potential black swan events that could shock investors in the same spirit as the untethering of the Swiss franc against the euro.
Black swans have three characteristics: they must be rare, extreme and predictable in retrospect. "Coming into 2015, there is an especially large number of trip-wire situations lurking on the global stage, and the market seems to know it," says Lorne Johnson, who is a senior portfolio manager at State Street, in a new report.
"In the case of the franc: it's rare that the Swiss National Bank ever surprises; the impact was certainly extreme, given the massive trading losses on some currency trading desks; and in retrospect, the move was actually predictable, given the euro's precipitous decline in recent months and the prospect of the European Central Bank implementing massive quantitative easing."
With a nod to Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, here is the list:
1. A Russian Debt Default
"In 1998, a similar plunge in oil prices did in fact push Russia to default on its debt and spark a (albeit brief) global financial crisis. More than a decade and a half of boom energy years have left Russia with far healthier reserves than it had then, but its relations with the West are far, far worse, complicating the potential for heroic interventions."
2. A Eurocrisis Redux
"While a complete breakup of the Eurozone must still be viewed as a doomsday scenario, the exit of a country - or two - can no longer be deemed completely out of the question and would be sufficiently disruptive for the shocks to be felt well beyond the Eurozone."
3. A US Monetary Policy Mistake
"The Federal Reserve faces a difficult conundrum. Following seven years of near-zero interest rates, it will need to carefully thread a communication needle to ease markets into a potential rate hike in 2015."
4. Social Unrest in Oil-Exporting Countries
"The oil decline could create unexpected instability throughout Latin America and Africa... In Nigeria, a failure of the state to maintain order could result in spillover to neighbouring countries and result in a reluctance by investors to further develop the region."
Because if there are any of these black swans lurking around, the Australian media will be talking about them. How painfully predictable. Even though the Herald has no idea what a back swan actually is.
Because if there are any of these black swans lurking around, the Australian media will be talking about them. How painfully predictable. Even though the Herald has no idea what a back swan actually is.
Dont worry they will somehow turn it into a beutiful white swan. For now anyway..
The 10 scenarios are basically worst-case outcomes of well-known, widely-analysed political and economic "stories" currently unfolding. There's not one even vaguely surprising premise on the list.
Surely the black swan meme has been tortured enough.
Because if there are any of these black swans lurking around, the Australian media will be talking about them. How painfully predictable. Even though the Herald has no idea what a back swan actually is.
Lots of black swans in Perth.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
The 10 scenarios are basically worst-case outcomes of well-known, widely-analysed political and economic "stories" currently unfolding. There's not one even vaguely surprising premise on the list.
Surely the black swan meme has been tortured enough.
Yeah. I was about to say the same. Although 1 and 2 could happen in unexpected severity and make the grade as black swans. 9 and 10 would be black swans because they are completely unpredictable, if possible. How about a 'flu pandemic that shuts financial markets for a fortnight?
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
"Clearly, ongoing reform initiatives and years of central planning mismanagement have resulted in a much more serious slowdown than many market participants anticipated."
7. An Overall Decline in Global Growth
"With most monetary policy tools all but exhausted by the world's largest economies, and with the ECB just completing the launch of its broad QE program, few salvos against slowing growth remain available to policymakers."
8. A Further Contraction in Commodity Pricing
"Further commodity price declines could disrupt markets via defaults on corporate debt in the energy and materials sectors, with general contagion to global credit markets."
9. Cyber-Attacks on Financial/Government Infrastructure
"A more concerted effort by hackers could cause major economic damage if banking networks or other payment systems are compromised."
10. A Significant Terrorism Surprise
"A series of coordinated attacks in European capitals, for example, could significantly hinder economic activity as individuals avoid city centers and other potential terrorist targets."
#2 - I don't believe Brexit was in the conversation Feb last year. It was all about Greece and the prospect of other PIIGS leaving Eurozone.
#8 - Glencore, US shale crash and Peabody Energy (about to declare bankruptcy).
#10 - two terrorist events in the last 12 months, France and Belgium.
Not predicted in this article are VW scandal and Japanese and Draghi NIRP.
CB's may have flooded banks with liquidity, but black swans caused by debt-induced, aggregate demand crash abound. And the liquidity have caused banks to pile on more risk as in the US shale market crash.
The wall to wall rolling black swan event has not faded. The battle between the tag team of share market bulls fueled by central bank liquidity vs it being eroded slowly by black swans.
Because if there are any of these black swans lurking around, the Australian media will be talking about them. How painfully predictable. Even though the Herald has no idea what a back swan actually is.
You prove that in Australia, Home ownership is the opium of the masses.
WHAT WOULD EDDIE DO? MAAAATE! Share a cot with Milton?
You prove that in Australia, Home ownership is the opium of the masses.
As is food - it is a good thing that governments realise this. Most people , excepting yourself of course, do not want to see a return ofthe rich landlord with their slum housing for the workers.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
The wall to wall rolling black swan event has not faded. The battle between the tag team of share market bulls fueled by central bank liquidity vs it being eroded slowly by black swans.
The European Central Bank has said that Monte dei Paschi di Siena’s capital shortfall has risen to €8.8bn from €5bn, significantly increasing the price tag of the rescue of Italy’s third-largest lender by the government.
In a statement released late on Monday, MPS also revealed that the ECB had warned that the bank’s liquidity had suffered a “rapid deterioration” over the past month, as it tried in vain to muster enough cash from private investors to avoid a state bailout.
The worsening capital and liquidity position at MPS marks a new twist in a long-running saga surrounding the fate of world’s oldest bank, which has arguably emerged as the weakest link in the Italian and European banking system.
Last week, the Italian government led by Paolo Gentiloni, the centre-left prime minister, approved the use of up to €20bn in public funds to help stabilise the most fragile financial institutions, which are saddled with non-performing loans dating from the country’s lengthy and deep recession.
MPS is in line to be the first beneficiary of the decree, after it became clear last week that it could not meet an ECB-mandated deadline of December 31 to raise €5bn in capital from the private market, despite an aggressive effort mounted by investment bankers at JPMorgan and Mediobanca.
But the Tuscan bank will now consume more of the Italian bank rescue money than previously thought: on Monday, the ECB sent a letter to the Italian finance ministry to inform it that MPS’s capital shortfall was now €8.8bn, compared to the €5bn it was estimated to need in the aftermath of July’s Europe-wide banking stress tests.
Rome will not have to cover the entire capital shortfall, since more than €2bn of the funds are expected to come from a haircut to institutional holders of junior debt in MPS under new EU rules on “burden sharing” in bank bailouts.
But the higher price tag for MPS will potentially give it less leeway to cover possible rescues of other smaller regional Italian banks which have been suffering from similar problems, even though Italian officials have insisted that there is ample room in the €20bn already approved.
In a statement released late on Monday, MPS also revealed that the ECB had warned that the bank’s liquidity had suffered a “rapid deterioration” over the past month, as it tried in vain to muster enough cash from private investors to avoid a state bailout.
The worsening capital and liquidity position at MPS marks a new twist in a long-running saga surrounding the fate of world’s oldest bank, which has arguably emerged as the weakest link in the Italian and European banking system.
Last week, the Italian government led by Paolo Gentiloni, the centre-left prime minister, approved the use of up to €20bn in public funds to help stabilise the most fragile financial institutions, which are saddled with non-performing loans dating from the country’s lengthy and deep recession.
MPS is in line to be the first beneficiary of the decree, after it became clear last week that it could not meet an ECB-mandated deadline of December 31 to raise €5bn in capital from the private market, despite an aggressive effort mounted by investment bankers at JPMorgan and Mediobanca.
But the Tuscan bank will now consume more of the Italian bank rescue money than previously thought: on Monday, the ECB sent a letter to the Italian finance ministry to inform it that MPS’s capital shortfall was now €8.8bn, compared to the €5bn it was estimated to need in the aftermath of July’s Europe-wide banking stress tests.
Rome will not have to cover the entire capital shortfall, since more than €2bn of the funds are expected to come from a haircut to institutional holders of junior debt in MPS under new EU rules on “burden sharing” in bank bailouts.
But the higher price tag for MPS will potentially give it less leeway to cover possible rescues of other smaller regional Italian banks which have been suffering from similar problems, even though Italian officials have insisted that there is ample room in the €20bn already approved.
One person close to the situation said that the higher capital shortfall was driven by the gloomier liquidity position at MPS.
Although the Tuscan bank is solvent, the ECB told the Italian finance ministry that its liquidity position had suffered from a “rapid deterioration” between November 30 and December 21, crucial weeks for its private capital raising effort. During that period, net liquidity at one month declined from €12.1bn, or 7.6 per cent of its activities, to €7.7bn, or 4.8 per cent of its activities. The Italian government is also providing liquidity guarantees to struggling banks under its €20bn rescue scheme.
One Italian official also said that once a government intervention was introduced, there was a change in the way capital shortfalls were calculated by the ECB, increasing the amount.
Rome will not have to cover the entire capital shortfall, since more than €2bn of the funds are expected to come from a haircut to institutional holders of junior debt in MPS under new EU rules on “burden sharing” in bank bailouts.
But the higher price tag for MPS will potentially give it less leeway to cover possible rescues of other smaller regional Italian banks which have been suffering from similar problems, even though Italian officials have insisted that there is ample room in the €20bn already approved.
One person close to the situation said that the higher capital shortfall was driven by the gloomier liquidity position at MPS.
Although the Tuscan bank is solvent, the ECB told the Italian finance ministry that its liquidity position had suffered from a “rapid deterioration” between November 30 and December 21, crucial weeks for its private capital raising effort. During that period, net liquidity at one month declined from €12.1bn, or 7.6 per cent of its activities, to €7.7bn, or 4.8 per cent of its activities. The Italian government is also providing liquidity guarantees to struggling banks under its €20bn rescue scheme.
One Italian official also said that once a government intervention was introduced, there was a change in the way capital shortfalls were calculated by the ECB, increasing the amount.
Rome intends to structure the MPS rescue as a “precautionary recapitalisation”, which applies to banks which are still solvent but require capital to meet regulatory standards in the event of a deep recession. The scheme involves a much less drastic hit to investors in the bank than is the case under EU rules if a bank goes into resolution, when even depositors over €100,000 can be “bailed in”.
Italian officials have tried hard to shield retail investors from suffering any fallout from MPS’s troubles.
Last week, the government said that retail holders of junior debt in a rescued bank would receive full reimbursement for their holding in the form of senior debt worth the same value.
Mr Gentiloni and Matteo Renzi, the former prime minister who remains head of the ruling Democratic Party, are trying to stamp out any political fallout from the banking problems, ahead of likely elections in 2017.
But the MPS bailout has also faced a political backlash from some politicians and officials in Berlin who believe that the bank should be wound down instead.
Jens Weidmann, president of the Bundesbank, Germany’s central bank, said in an interview with Bild newspaper that the MPS bailout needed to be “carefully examined”. "State funds are only intended as a last resort, and that is why the bar is set high,” he said.
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