I’m watching with great heartbreak and concern as the aftermath of the massive earthquake and tsunami in Japan unfolds and can’t help but notice how the Germans and Swiss are putting a hold on nuclear power plant construction, even though I would be willing to bet that plant technology has probably gotten better in the last 40 years, and the probability of a tsunami in Switzerland is just about zero (or at least, if they do have a tsunami in Switzerland, we are all in very deep trouble). Ugly events come to our attention, and then we look at the outcomes and in a flash of human nature, start to actually see the issues.
Take the Michigan budget suggested by Michigan’s Governor Snyder: Seems like an elegant CPA-type solution: rework the tax rates so corporations pay income taxes (6%), individuals pay taxes (4.25% on working or retired), and budgets are cut. Good, right? Not if you receive a pension (NIMBY!). Not if you received the earned income credit (NIMBY!) Not if you’re a state worker (NIMBY!). Cut the budget, but by gosh, don’t cut my piece of the pie.
Or our friends (I use the term loosely) in Washington, they’re quibbling about the spending bill and arguing over a $6B cut. Six billion sounds like a lot, right? The deficit for 2011 is $1.67 Trillion! Six billion on 1.67 trillion is 0.35%. That would be like your daughter in law complaining about her $40,000 credit card balances and then arguing with your son over a $143.72 payment. Sorry folks, but a $143.72 payment does not get rid of a $40,000 bill, nor does a $6B cut on a $1.67 T deficit do anything. Wake up, Washington (I think they are all sitting around a campfire singing NIMBY: ‘Not in my backyard, lord, not in mine…’ to the tune of ‘Kumbaya’).
And then there’s the Middle East. I haven’t seen ‘The Social Network’, but I’m thoroughly impressed that Facebook can overthrow Egypt, disrupt at least 14 countries in the Middle East, and cause our old buddy Muammar to be in a full-fledged battle for his life (and his kid’s million dollar allowances). How will it shake out? I see it like a Greek play: there’s act one, the build up; act two, the crisis; and act three, the finale. I can’t help but envision Osama banging his head against the cave wall thinking ‘I should have used Facebook.’ On the other hand, as we all know anything can happen. I do envision Gaddafi sitting with his bodyguards (look it up, it’s interesting) saying ‘NIMBY!’
What does this all boil down to? Nasim Talib (who I have had the privilege of meeting) wrote a wonderful book called ‘The Black Swan’. A Black Swan is a metaphor (in the 18th century, geneticists were certain there could not be a black swan, until they happened to go to the Pacific, where all the swans are black), for an event that is a surprise to an observer and has a major impact. After the fact, the event is realized by hindsight. It’s amazing how many unpredicted and undirected events happen. Consider this list of black swans from Doug Kass, of ‘once in a lifetime’ events in the last ten years:
Black Swan events over the past decade
• Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
• 78% decline in the NASDAQ;
• 2003 European heat wave (40,000 deaths);
• 2004 Tsunami in Sumatra, Indonesia (230,000 deaths);
• 2005 Kashmir, Pakistan, earthquake (80,000 deaths)
• 2008 Myanmar cyclone (140,000 deaths);
• 2008 Sichuan, China, earthquake ( 68,000 deaths);
• Derivatives roil the world’s banking system and financial markets;
• Failure of Lehman Brothers and the sale/liquidation of Bear Stearns;
• 30% drop in U.S. home prices;
• 2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths);
• 2010 Russian heat wave (56,000 deaths);
• 2010 BP’s Gulf of Mexico oil spill;
• 2010 market flash crash (a 1,000-point drop in the DJIA);
• Surge of unrest in the Middle East; and
• Thursday’s earthquake and tsunami in Japan.
All that and we’re still here. In our case at hand, Japan will rebuild (probably better than before), nuclear plants will be safer and better, earthquakes will continue, some budgets will be balanced, and other budgets will be largely ignored. Markets will rise, and markets will fall. And we’ll be surprised by the next ‘once-in a lifetime’ event. And after the horses have run out of the barns, we’ll close the door.
Don’t be too surprised by Black Swans. (The events, not the movie.)
PS: Kudos to the late George Carlin on his ‘NIMBY’ skit. And thanks to Mike Reed for pointing out the Black Swans.