The concept of the "Black Swan Event" was introduced in Nassim Taleb's book, "Fooled By Randomness". Borrowing from Wikipedia, the definition of a Black Swan event, is a "large-impact, hard to predict and rare event beyond the realm of normal expectations".
The term "Black Swan" is intended to indicate something rare, as in the occurrence of black swans in nature.
While it's easy to agree that such events occur, I do not agree with all of Taleb's conclusions regarding these events. One of his key assertions in the book is that the markets are random (why not, the text books say so) and all trading success in the markets can be ascribed to luck - that is of course except his own proprietary trading system. (As an aside if you are thinking of reading his book, this guy has the ego the size of the Grand Canyon, which makes it a difficult read).
His key point regarding Black Swan events, is that any trading strategy that works today or even for a few years, will eventually be wiped out a by a Black Swan event, because these, after all, are "unforeseen events".
My problem with this theory is that I don't believe Black Swan events are all that rare. Apparently the Asian currency crisis in 1987, the LTCM debacle in 1998, and 9/11, are all examples of Black Swan events. And yes, these financial crises all had different and unpredictable causes, but the outcomes were all relatively similar: the markets - stocks, commodities, risky bonds etc. all declined in unison, while "safe" treasuries rallied. If you tell me that a major selloff can happen three times in 5 years, then I probably should have a contingency plan to deal with such an occasion. The fact that millions of traders have survived all three of these recent events, tells me there is something wrong with his wipe out theory.
In addition, in order to define something as "rare" you need to have a time frame in mind, otherwise the use of the term could be completely erroneous. For example, on a day-to-day basis, a currency crisis is very rare, but over the course of a century, currency crises are relatively common occurrences.
Why waste my time or worse yet your time with all this? Simply because I know weeks or months from now, Taleb will be doing the talk show circuit telling everyone that this current crisis is a "Black Swan" event. There is no way it could have been predicted. Those (like me) who say they predicted it, are statistical anomalies - lucky fools. Unfortunately for Taleb, his theory cannot be proven. It is academic bullsh*t, no different than saying that a pro baseball player who hits home runs every night is a statistical anomaly - skill plays no role. I get it that Depressions don't happen everyday, however, from a historical perspective, they are not uncommon. There is no Great Power in the history of this planet that has ever borrowed its way to prosperity, and the United States won't be the first. Yes, trying to time the exact timing and sequence of the decline is/will be difficult, but the outcome is still inevitable.
For anyone to say that the current credit/economic fiasco was impossible to predict is like me quitting my job, maxing out my credit cards, mortgaging my house and then saying bankruptcy came out of nowhere.
My advice to Taleb is to put down his Monte Carlo simulator and pick up a copy of Paul Kennedy's Rise and Fall of the Great Powers, which is a must read for anyone who wants to put current events into historical context. From this book it is apparent that "Black Swan Events" are not very uncommon at all i.e. what the United States is experiencing now (competitive decline, depletion of the treasury, financial engineering, hubris, strategic overreach, energy shortage) has occurred to many other "Great" nations over the past 500 years.
The Boy Who Cried Wolf...
Which brings me to my other key point, that there is a line of specious reasoning making its rounds in the Mainstream Media which is the notion that something that hasn't happened so far, can't happen. After all, we've had debt and deficits for 30 years, no? We've survived the S&L crisis, the 1997 crisis, 1998 LTCM crisis, 9/11, so why should this time be any different? Those "perma-bears" have been crying doom and gloom for years now!
This line of reasoning is so specious that it falls strictly under the category of DISINFORMATION. It brings to mind the chain smoker who smokes for 20 years and thinks that he is invincible. Let me put a question back to these same cheerleaders: If massive debt and deficits are such a good idea, then why stop at giving out $1200 stimulus checks? Why not make it $60,000 per family - how about $6,000,000? Oh right, that's just crazy talk. Everyone knows that $1200 is the optimal amount...
One last thought for those who lump all bearish forecasters together as "perma-bears" and "stopped watches" in order to deride the messenger and ignore the message. The fact that the "Boy" was early in his forecast did not affect the outcome. In the end the boy was right: The wolf came, and it ate everything...
