How many times have you seen a black swan?
Just like you, all of mankind had never seen such a thing either. Matter of fact up until 1697 black swans were thought impossible to exist. Can you then imagine the shockwaves it delivered to the world of science when these swans were discovered in Western Australia?
That’s how Black Swan events got their name: low in probability and high on impact. Such an event is unlikely to happen under usual circumstances.
Curiously though, these occurrences are taking place on a more frequent basis. It is almost as if one high impact event would take place each year. Although an “anticipated Black Swan” is a bit of an oxymoron, we might as well accept and be ready for one. Economics, industry and finances have become increasingly volatile, uncertain and ambiguous, it is imperative that we learn of immediate historical events to stay guarded against them.
Here’s a chronological run-through of some of these major black swans and a quick note on what we can learn from them:
1. The Asian Financial Crisis (1997)
When Thailand decided to unpeg the Bhat to the US dollar, it triggered a series of currency devaluations that spread throughout South East Asian and East Asian markets.
The Damage: As a result of the devaluation of Thailand’s baht, a large portion of East Asian currencies fell by as much as 38%. International stocks also declined as much as 60%.
The Lucky Few: George Soros as chief of hedgefund Quantum, George Soros was accused of triggering the crisis by shorting the Thai baht and most famed for profiteering from the crisis. In his defence, he argued that his hedge funds did not start the crisis, although they played a role in the turmoil.
Lessons Learned: There is little a private investor can do about major government decisions. Other than through the democratic process, the best you can do is to hedge your investments and prepare against sharp devaluations.
2. “Dot-com” crash (2000)
Following the spread of internet use throughout the world, businesses were quick to capitalise on the growing frenzy. Companies went public in a hurry and their stocks rocketed, driven by greed and speculation. NASDAQ burgeoned from 1,000 points in 1995 to more than 5,000 in the year 2000. At its peak, several leading high-tech companies such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling.
The Damage: In less than a month, nearly a trillion dollars worth of stock value had completely evaporated. The NASDAQ composite index rose from 751.49 to 5,132.52, a 682% increase, from January 1995 to March 2000. By the end of the crash, Nasdaq Composite lost 78% of its value as it bottomed to 1114.11.
The Lucky Few: Some of the startups of the dot-com bubble are still alive and thriving today. They include companies such as Amazon, eBay, Yahoo and Netflix. Excerpts from the leaders of these companies reveal a common pattern: that of focusing relentlessly on customers, not to sacrifice long term gains to ease short term pains and to stick fiercely with building a high-value product.
Lessons Learned: Don’t tailgate a speeding stock. When it slams on its brakes you’ll crash right into it.
3. September 11 attacks (2001)
To prevent a stock market meltdown following the plane crashes, the NYSE and NADAQ shut trading on Tuesday morning of September 11th, 2001. When markets resumed, the NYSE fell 684 points – a 7.1% decline. This was a record loss in exchange history in one trading day.
The (Financial) Damage: When markets closed for the week, it saw the biggest loss in NYSE history. The Dow Jones was down 1,370 points – a loss of 14%. Standard and Poors was down 11.6%. $1.4 trillion of value was lost in five days of trading.
Lessons Learned:You won’t be able to predict when a black swan event happens. Nor the scale of its impact. To ready yourself for such an event, go back to the basics of risk management. Having a stop-loss price is one of them. Use a price alert tool such as Call Levels (call levels link) to let you know if trigger prices have been met following an event and decide if you will sell to prevent heavy losses.
4. Lehman Brothers collapse (2008)
On September 15th, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, the bankruptcy filing was the largest in history. Its demise made it the largest victim of the U.S. subprime mortgage induced financial crisis that infected global financial markets.
The Damage: Although Lehman’s bankruptcy led to more than $46 billion of its market value being wiped out, it is the larger fear that its collapse will implicate other larger, more complex institutions and that they too will fall.
The Lucky Few: Many believe that the banking industry are the winners. By the second quarter of 2013, U.S. banks earned a total of $42.2b the biggest industry profit in history. The U.S. government pumped a $700-billion Troubled Asset Relief Program to make investments in hundreds of banks, beefing up their capital cushions. The Federal Reserve also came to their aid. The banks were dubbed “too big to fail” and executive intervention made them lucky winners.
Lessons Learned: A financial crisis wipes out value no doubt, but consider the wisdom of “buy when there is fear”. Although the disaster had put many into financial ruins, there are reportedly many who have capitalised out of the carnage: those who have bought when the markets are at their worst. Protect your investments, manage your risks and capitalise when the markets are ready to bounce.
5. Iceland Banking Crisis (2008)
The Icelandic financial crisis was a major economic and political event in Iceland that saw the default of all three of the country’s major commercial banks. The banks could not fulfil short-term debt and resulted in a run on deposits. Iceland’s systemic banking collapse was the largest experienced by any country in economic history. It led to a severe economic depression in 2008–2010 and significant political unrest.
The Damage: The krona fell by more than 80 percent against the euro in 2008 and the stock market lost 75 percent of its value. Real wages fell by 4.2 percent in 2008 and another 8 percent in 2009. The unemployment rate rose from 1 percent in 2007 to 8 percent in 2009. Iceland’s GDP fell by a combined 9.3 percent from 2008 through 2010.
The Lucky Few: Large scale losses such as this presents itself as an opportunity to bottom feeders and scavengers. Good investments with sound fundamentals and are able to whether through panic selling will present themselves as good bargains to pick up. Currency crashes are opportunities for export oriented businesses. The risks are very high though, it is hard to tell when a market has bottomed out and attempts to try and catch a falling knife can get weak investors very hurt.
Lessons Learned: What are the chances that the 3 biggest banks of a nation would default? It is a random event…a random walk. Random walk theory suggests that stocks take a random and unpredictable path. Burton Malkiel, the writer of “A Random Walk Down Wall Street” had said that a long-term buy-and-hold strategy is the best and that individuals should not attempt to time a market.
6. Greece Government Debt crisis (2010)
In 2010, with global markets still struggling through a financial meltdown, Greece suddenly announced that it had been understating its deficit figures for years. Flags went up and what followed after was a crisis of confidence. In 2012, Greece launched the largest sovereign debt default in history. On June 30, 2015, it became the first developed country to fail to make an IMF loan repayment. Markets around the world reacted strongly to the news. Stocks tumbled from Hong Kong to London, gold and U.S. Treasurys strengthened as investors looked for safety.
The Damage: The Greek crisis resulted in a 25% fall in GDP since 2010 and an increase of 26% Greek unemployment rate. The country now has a debt value of €320bn.
The Lucky Few: Importers of European goods. The Greek crisis affected the value of the Euro. As the Euro’s value decreases, European goods will become more affordable to foreign purchasers. Euro made products such as cars, wines, electronics and luxury goods will become more attractive to global buyers. As would tourism to the continent.
Lessons Learned: Greece was an excellent lesson in controlling debt. Before Greece joined the Eurozone, it was considered a credit risk. But after joining, the credit risk disappeared. The country could then borrow cheaply. Long story short, manage your debts and don’t borrow more than you can afford to repay.
7. Fukushima Nuclear Disaster (2013)
Dubbed as Japan’s Chernobyl, the earthquake triggered nuclear disaster is the country’s most tragic event since the atomic invasion of 1945. Today it is reported that the disaster isn’t over. The radioactive fallout is contained, but not extinguished. Radiation contamination persists in and around the destroyed reactors. Nearby villages will remain dangerous and inaccessible indefinitely.
The Damage: The market plunge in Japan saw the Nikkei 225 fall by as much as 14%, its biggest two-day drop in 40 years. In the United States, the Dow Jones fell 1.15%.
The Lucky Few: There are never any winners where there is loss of lives and property. Although companies linked to the nuclear energy were badly hurt, the disaster gave greater impetus to governments to reconsider nuclear power as an energy source. In Europe, Germany announced that it would gradually turn off all nuclear power plants forever.
Lessons Learned: One can consider the long-run economic impact of natural disasters. There are studies done on this, a summary of the findings reveal that negative long-run impact of natural disasters is especially large when the disaster is followed by a drastic political regime change (such as the Iranian revolution of 1979). Otherwise, the long-run economic impact of a natural disaster is almost zero. Some other studies find that a natural disaster can actually increase the long-run level of output. This is consistent with the idea of “creative destruction” as an important determinant of economic growth.
8. Oil Price Slump (2014)
In July 2008 oil reached a record peak of US$147.27 and though a series of rollercoaster ups and downs, it had continued a decline that persists up till today (hovering at about US$40). Internationally, low oil prices are wreaking havoc with commodity-exporting nations, including manufactured good exporters like China. There are prolific reasons for the plunge, some theories blame oversupply. Others blame speculation and price wars.
The Damage: Oil producing nations are very hard hit. Russia for example, is one of the world’s largest oil producers, and its economy depends heavily on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices do not recover.
The Lucky Few: Some economists believe that a 10% fall in oil prices should lead to a 0.1% increase in economic output. China, which will soon become the largest net importer of oil, should gain from the falling prices.
Lessons Learned: A fall in oil prices is directly detrimental if you’re invested in commodities or energy related stocks, however there are industries that profit. Airlines and transportation are an example of these beneficiaries. The wisdom here is to seek profit amidst gloom.
9. Ruble Collapse (2014)
In December 2014, the value of the ruble dropped by as much as 19 percent in 24 hours, the worst single-day drop for the ruble in 16 years. Then, Russians were reportedly rushing to swap cash for washing machines, TVs, or laptops—anything that seems as if it might hold value better than paper money, whose worth is evaporating in real time. What happened was irrational fear, a rush on investors to get their money out of Russian assets. It was a run on the entire country.
The Damage: On the 16 December 2014, the RTS Index declined 12% – the highest since the the global financial crisis in November 2008. The decline of RTS Index fell up to 30% during the month of December. In response to rising interest rates and bank runs, the interest rate on Russian three-month interbank loans rose to 28.3%, higher than at any point in 2008. During the crisis some foreign companies even halted their business activities in Russia.
The Lucky Few: It turns out that the winners of the Ruble crisis are the financial elites. It was reported that four private banks with friendly ties with the Kremlin are emerging as big winners from Russia’s economic crisis, helping out dollar-starved companies at a time when large state lenders are hampered by Western sanctions.
Lessons Learned: When one is trading in a foreign market, familiarity and research are important foundations any investor would base their decisions on. What happened in Russia could have (and could still) result in a worst case scenario of economic collapse and hyperinflation.
10. SNB Swiss peg removal (2015)
In a surprise move, the Swiss National Bank unexpectedly scrapped its three-year policy of capping the Swiss franc against the euro. The central bank ended its cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced less than a month ago. The decision resulted in shockwaves and market turmoil throughout the equities and currency markets. “The decision has been a surprise for markets – you can’t do it in any other way,” said SNB President Jordan. “We came to conclusion that it’s not a sustainable policy.”
The Damage: Shortly after the central bank’s announcement, the Swiss franc soared by around 30 percent in value against the euro. The currency also gained 25 percent against the U.S. dollar, before falling back to trade around 12 percent higher at 0.901 francs per dollar. The move also hit European equity markets hard, with the Swiss benchmark stock index falling by more than 10 percent at one point.
The Lucky Few: With an appreciated Franc, it is the importers this time that benefit. Over the long term, the raw materials used to make exports (think expensive Swiss watches) will become cheaper. Currency speculators also had some risky profit to make. JP Morgan for example, reportedly made between $250 and $300 million from the Swiss franc’s move in 2015.
Lessons Learned: Black swans can take place anywhere. Even Switzerland, a country renowned for being a safe-haven, for stability and confidence could make decisions that would negatively impact your portfolio. Being ready, taking steps to mitigate risk and to always keep a finger on the pulse of the market are perhaps your best defence against such an event.
11. Chinese Stock Market Turbulence/ Crash and Devaluation of Yuan (2015)
Shares in China plunged 30% in 2015 for three weeks owing to “panic sentiment” gripping investors, many of whom are individuals that have borrowed heavily to play the stock market. This was followed by China’s decision to devalue the yuan resulted in a cumulative 4.4% drop against the US dollar. The move pressured other central banks around the world to push down their own currencies. This was to help their own exporters and to prevent destabilizing capital flows. These actions could hurt commodities markets because it signals potential weak demand from China.
The Damage: On the 24th of August 2015, the Shanghai main share index lost 8.49% of its value. As a result, billions of pounds were lost on international stock markets with some international commentators labelling the day Black Monday. Similar falls of over 7% on the 25th of August led to the day to be called Black Tuesday. Global companies that relied on the Chinese market suffered from the crash. Stocks that they own were devalued US$4,000,000,000,000.
The Lucky Few: According to Christopher Wolfe, head of the chief investment office of Merrill Lynch Wealth Management, the turbulent Chinese markets could even be a good time to buy stocks, according to USA Today. Wolfe explains that most U.S. investors aren’t significantly exposed to Chinese stocks and that the turbulence is only momentary. Once China’s economic blueprint is revealed, it will pave the way to buying opportunities.
Lessons Learned: When large economies make major changes to their fiscal policies, that can be seen as a cue to adopt a defensive position.
12. Brexit (2016)
Britain’s exit from the European Union caught many analysts and observers by surprise. There are public opinions that the country is even ill prepared for the exit. The result was a Pound that crashed to a 31-year low against the dollar. The economic outlook is as uncertain as the referendum itself: there are divided opinions on whether Britain is headed for a recession or it will run faster and further without an EU weighing it down.
The Damage: On the day of the referendum, the pound dropped as low as $1.32 versus the U.S. dollar in overnight trading, a level not seen since 1985. It was down against all major world currencies. At the end of the London trading day on Friday, the pound was down by nearly 9% against the dollar, making this one of the biggest one-day declines on record. Globally, Brexit panic wipes $2 trillion in value off world markets.
The Lucky Few: At the time of writing, the impact of the historical referendum is still unravelling. The stock and currency markets have recovered somewhat and those who have profited include investors (or speculators) who betted on panic selling. A lower pound would boost revenues for those in the export, tourism and manufacturing markets.
Lessons Learned: The 21st century will be just like the British referendum: unexpected and uncertain. Investors will have to learn to adapt to such an environment and to do the necessary risk management measures.