21. The Black Swan Event - Coronavirus

Updated: Jun 8, 2020

Is the Coronavirus Outbreak a Black Swan Event in recent human history ?

We have not seen a situation ever before in recent times, wherein the country goes into lockdown within a few days,....


Suddenly, companies are asking employees to work from home and public spaces are filled with people wearing masks. There is going to be an instinctive reaction to protect oneself, but against what? People largely know by now that something is wrong but to be told it is an infection with no symptoms, and anyone could give it to anyone, is terribly frightening.


The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist – a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.


The theory was developed by Nassim Nicholas Taleb to explain :



The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.

  1. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities.

  2. The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event's massive role in historical affairs

Unlike the earlier and broader "black swan problem" in philosophy (i.e. the problem of induction), Taleb's "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences. More technically, in the scientific monograph "Silent Risk",Taleb mathematically defines the black swan problem as "stemming from the use of degenerate metaprobability".


Examples Taleb gives of black swan events include the rise of the Internet, the personal computer, World War I, the dissolution of the Soviet Union and the September 11, 2001 terrorist attacks. He underscores the point that the black swan event depends upon the observer.


Taleb's bookThe Bed of Procrustes summarizes the central problem: " we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas".


Taleb disagrees with Platonic (i.e., theoretical) approaches to reality to the extent that they lead people to have the wrong map of reality, rather than no map at all. He opposes most economic and grand social science theorizing, which in his view, suffers acutely from the problem of overuse of Plato'sTheory of Forms. Based on these and other constructions, he advocates for what he calls a "black swan robust" society, meaning a society that can withstand difficult-to-predict events.


Aftermath of Coronavirus -


1) Crude Oil Scenario


No place to store and with sluggish demand, Oil Prices are plummenting down at an abnormal speed.


Global oil prices plunged to below $30 a barrel, the lowest level in more than four years. Oil has fallen by half since the start of the year, and some analysts predict that oil prices could drop below $20 a barrel in the coming weeks.



For oil importing countries like India, this fall may be a blessing in disguise.


2 ) Stock Markets Scenario at the moment.


The S&P 500 fell 12 percent, its biggest drop since the coronavirus outbreak began to roil markets in the United States last month — and its worst daily decline since October 1987, when stocks plunged about 20 percent in what came to be known as Black Monday. For the technology heavy Nasdaq, the drop was its worst on record.


Energy prices also slid sharply as investors factored in significant slowdowns in economic activity.


3) Catch up: Here’s what else is happening.

  • Europe’s auto industry is coming to a standstill. PSA, the maker of Peugeot and Citroën cars, said it would suspend production at all of its factories in Europe. Renault is closing its French factories, idling 18,000 workers, and Fiat Chrysler is also shutting factories.

  • NBC confirmed on Monday that “Saturday Night Live” would remain dark until further notice. There were six scheduled episodes remaining this season, which normally ends in May.

  • Shares of the largest banks in the United States were hit particularly hard on Monday, with JPMorgan Chase, Bank of America and Morgan Stanley all down around 13 percent. On Sunday, the eight largest U.S. banks announced that they would suspend buybacks of their stock — a move that would help them keep cash on hand in case conditions in the financial markets grew unstable.

  • The falling price of crude is being reflected at the gasoline pump. The U.S. average price for regular gasoline fell 13 cents a gallon over the last week, according to the AAA motor club, to $2.25 a gallon. Eleven states now average below $2 a gallon.

4) Predictions from Goldman Sachs

Coronavirus has pushed the global economy into a recession of historic proportions and halted the longest-lasting equity bull market on record. As infections spread globally, economic activity collapses, markets recoil and policymakers respond, the depth and duration of the economic and market downturn.


@ Goldman Sachs has revised its coronavirus projections, seeing an even bigger impact on GDP and employment.


@ The firm sees the jobless rate topping out at 15% and GDP sagging by a record 34% in the second quarter.


@ That will be followed, though, by a 19% rebound in the third quarter that would be the highest on record, Goldman said.


Economists at the firm cite “anecdotal evidence and the sky-high jobless claims numbers” to back its unemployment forecast. Nearly 3.3 million Americans filed first-time claims for unemployment compensation in the most recent week, and Goldman predicts another 5.5. million to be counted when the next report comes out Thursday.

5 ) Coronavirus - Key Takeaways from Standard & Poor

  • As the U.S. battles the COVID-19 outbreak, S&P Global Ratings has affirmed the 'AA+' long-term and 'A-1+' short-term sovereign credit ratings on the country. The ratings reflect the country's diversified and resilient economy, monetary policy flexibility, and status as issuer of the world's leading reserve currency.

  • The outlook remains stable, reflecting our view that unprecedented fiscal and monetary stimulus will limit the current economic downturn. The stable outlook also reflects our expectation that negative and positive rating factors will be balanced over the next two years.

  • We expect an economic recovery next year and continued GDP growth afterward. A larger and prolonged deterioration in public finances could pressure the ratings. On the other hand, we could raise the ratings if we see signs of more effective and proactive policymaking beyond the policy response to the current recession.


But, Whatever the nature of the reason, Good or Bad , But world will change after Coronavirus.


At present moment ,in Fortune 500 comapnies List, China over took USA with 124 against 121 of US.


Even, China has the Four Top Banks in Top 10 Banks in the World, higher than US. This kind of scenario is just unthinkabe in two decades back. One way or other, World is changing and we are all witnessing this and becoming part in this part of history.


Whether China is going to replace USA as a largest Economy in the world, much faster than anticipated. Then, What Next ? .


Wealth in the Stock Markets eroded by 25-35 % across the globe except in China.


Who is root cause for this Coronavirus Outbreak will comeout in a short span of time, US and China blame game may continue for sometime or just a natural occurence, could not be contained in the early stage.


Hegemony of Political Powers may change.

How it look like in future.

Need to wait and watch..


Whether some country launched a Biological Warefare or try to bite something, which they canot chew or swallow. Or, whether its back fired strategy or Its a historical blunder or natural occurence...??


Whatever is happening in the World today because of Coronavirus, it is definitely a Black Swan Event , with no predictability and had a huge impact on the whole world.


Epilogue


The Plague, a bacteria-led pandemic (1896 to 1939), caused 12 million deaths; Spanish Flu, caused by a virus, claimed 12 million lives in India over a period of just three months in 1918.


But, World survived and bounched back.


It will pass through the Conronavirus too. But, we have to Wait and Watch for What kind trails it will leave on Humans and on Human Histoty and on Future.


*****


Profile of Proponent of Black Swan Theory - Nassim Nicholas Taleb :


Nassim Nicholas Taleb ( born 1960-) is a Lebanese-American (of Antiochian Greek descent) essayist, scholar,statistician, and former option trader and risk analyst, whose work concerns problems of randomness,probability, and uncertainty. His 2007 bookThe Black Swan has been described by The Sunday Times as one of the twelve most influential books since World War II.

He has also been a practitioner of mathematical finance, a hedge fund manager, and a derivatives trader, and is currently listed as a scientific adviser at Universa Investments.

Taleb received his bachelor and master of science degrees from the University of Paris. He holds an MBA from the Wharton School at the University of Pennsylvania (1983), and a PhD in Management Science from the University of Paris (Dauphine) (1998),under the direction of Hélyette Geman.[25] His dissertation focused on the mathematics of derivatives pricing.


According to a profile in Le Monde, Taleb reads in ten languages


MM Rao


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Sources :

https://www.nytimes.com/2020/03/16/business/stock-market-drops-recap.html

https://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb

https://www.cnbc.com/2020/03/08/oil-plummets-30percent-as-opec-deal-failure-sparks-price-war-fears.html

https://www.eenewsautomotive.com/news/covid-19-brings-car-production-europe-halt

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