9/11, Katrina and Black Swan Events
In my last column here, I suggested that there will likely be some kind of economic disruption between the 4th quarter of 2018 and the 4th quarter of 2019. The column triggered some interesting reactions.
A number of people pushed back, as they feel that we are in a great economic time with growth, profits and employment all up. All true. They are enjoying this sense of a growing and vibrant economy since it has been so long since they have felt this bullish euphoria. However, I sense a certain fragility in the global economy as I wrote in the last column
Several people whose financial and investing insight I highly respect, reached out to convey that they agree with my prognosis, each one citing certain financial and debt-oriented problems they see on the horizon. This was nice to learn, as I think I am generally positive, optimistic and excited about the times ahead. I do think humanity has entered perhaps the most exciting, disruptive, transformative time in our history. Across the spectrum of technology, intelligence, medicine and education we stand ready to create entirely new ways of doing things and living than those we accept from the 20th century as “reality”. The only area I see being problematic in the next 10 years is the old economic banking system that came into being in the last century.
Recent travels made me think that the underlying fragility I see could become widely apparent if there was some major black swan event soon. Black swans are unpredictable events that profoundly affect the world. The thinker and writer Nassim Nicholas Taleb popularized the term black swan in his book of the same name. These events not only rattle our world, but can alter the trajectory of history.
I was in New York a few weeks ago to give a speech to a major private equity firm. Staying over an extra day, my wife and I went down to the 9/11 memorial that neither of us had seen since completed. It is a beautiful and emotional place. After paying respects to the chiseled name of a college friend, who, working that day at Kantor Fitzgerald, lost his life, we wandered around and spent time taking it all in.
9/11 was truly a black swan event that altered the world. It shaped the arc of history in this century. We are still in a war that was started that day.
Two weeks later we were in New Orleans, again for a speech. Having visited the city as a child in the 1960s, attending a Mardi Gras in the 1970s, a final four in the 1980s, several TV conventions in the 1990s and a trip there with my son in 2003 I have visited the city almost every decade of my life. Katrina happened in 2005 and it is clear that New Orleans is no longer the city it used to be. The population is down by 25% and it has become a tourist echo of its legendary past.
One black swan event rearranged the geo-political global landscape and resulted in tens of thousands of deaths. The other one decimated a city and caused some 2,000 deaths.
It has been a long time since the U.S. has had a black swan event. Probability suggests that one might happen sometime soon.
We live in times when the old economic models, political systems and social structures are being challenged across the board. The “old” seems dysfunctional but the “new”, while showing itself, is not yet ready to replace the “old”. We are entering a period of creative destruction unparalleled in history. This is what leads me to sense a fragility in the global economy and the U.S. economy. We celebrate on the metrics of the old as they lose accuracy and validity.
What if there is a black swan event soon?
There would certainly be some economic reaction immediately. This could well highlight the fragility I see in the connected global economy. Given the current landscape of social unrest in Latin America and Eastern Europe, a Puerto Rico that is still decimated, volcanic and earthquake activity in the Pacific “ring of fire”,the ever-present unrest in the Middle East, issues between China, North Korea and the U.S., some black swan event could tilt everything into some new reality.
2017 was the record year for damages and losses due to extreme weather events in the U.S. with $309 billion. This beat 2005, the year of Katrina, by $100 billion. If the aggregate of climate and weather-related disasters around the world went up from last year, the collective damages will most certainly affect economic growth and stress economies.
Black swan events can also help accelerate the rise of new ways of doing things, of new ways of thinking that get propelled forward to replace the old that is breaking or at least creaking under the stress.
As I have written before, the next 20 years will be more transformative than any 50 year period in history. The outcome, the new realities of the late 2030s may well be glorious, but the road there will be full of disruption and change. That can clearly be seen.
Black swan events cannot.