Black Swan Events

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and isextremely difficult to predict; the term was popularized by Nassim Nicholas Talab. Throughout history of the financial markets there have been a number of black swan events such as the dot.combubble, black Wednesday and more recently the 2008 financial crash. Some black swan events: - A large banking institution fails: Since 2008 the world of banking has changed forever- the events led to one of the largest ever government bailouts of the banks and the advent of new regulations such as The Dodd-Frank Act, a United States federal law thatplaces regulation of the financial industry in the hands of the government. It has widely been cited that the banks have never fully recovered and inherent problems have been simply covered up rather than treated. Some particular examples of Banks that are prime targets to have problems in thenear future are Deutsche Bank, Barclays and RBS in the UK Intesa Sanpaolo in Italy, and Santander in Spain. The problems associated with these banks, both on the retail and the investment side, are high levels of non-performing loans, questionable core capital ratios and high levels of leverage and derivative exposure. Over in America, Wells Fargo has issues with miss-sales of financial products. mWith the markets being at record highs, a failure of a key bank could be the catalyst to start a market correction.The failure could arise from a major default or a cyber-attack. - A nationwide property crash Since 2008 the property market in the UK has steadily grown, money moved out of equities and into property, rich overseas investors piled money into expensive new build property taking advantage of record low interest rates mand took the view to speculate on a rising London property market. More recently, foreign economies have suffered and rich overseas investors have fled due to currency weakness,Brexit issues and falling property values, availability of credit for the average consumer has tightened and with job losses in the UK tipped to continue in the financial district, this could affect demand for London housing. A London exodus could have effects on the wider property market in the UK, automation has led to falling wages and higher living costs have impacted affordability, people are more inclined to rent than buy and currently we are seeing falling demand and house prices which could accelerate the process. The knock-on effects to a property crash could be mortgage defaults, leading to further fire sales which would in turn meaning writing down of assets held by the banks which could massively affect the bank’s profitability. The single biggest thing the average person owns in their lifetime is a property, so it is unlikely property would just “crash” all of a sudden, but a slow steady decline over the next 5 years is definitely a possibility. - War A war scenario can play out in various ways, with the main targets at present being North Korea, Russia and certain areas in the Middle East. It is worth noting historically during times of economic hardship a war scenario has often got a country’s economy out of the doldrums. If North Korea were to fire a short-range missile at Japan this could destabilise the far east region causing significant problems. Currently the situation with Iran has come out of almost nowhere, with oil tankers being hijacked and the US placing the blame firmly on the country.This being said it can be thought that a war from certain points of view is deemed to have a positive stimulus effect, therefore it may be worth calling into question the authenticity of any war scenario. - Natural Disasters An increase in natural disasters has been noted whether due to natural events or otherwise, the increased frequency causes massive financial and physical damage these also are catalysts to a market correction in some respect. Hurricanes, earthquakes, disease outbreaks and even things such as asteroid strikes should not be ruled out. The governments of the world use the natural disasters as a way to re-route money and stave off difficult economic decisions such as interest rate rises. - Market Crash due to a cyber attack The markets currently are defying gravity and with record amounts of money going into passively computer controlled ETFS, this is not likely to stop and the markets continue to trade at an irrational valuation to real asset values. The point becomes unsustainable, the market could mysteriously suffer a global correction, which could be traced back to a cyber-attack which would completely wipe out large sections of value in the markets. With global internet outage the banks and financial institutions with rapidly mark down assets, as the net comes back the reference point valuations may be massively different to the point prior to the event. With this the value of real money falls significantly and the cyber currency bitcoin rises to unseen figures never thought possible. The US cyber security firm earlier this year LogRhythm predicted this event to occur at some point in 2018 obviously this has not yet happened but could still be on the cards. - The internet is controlled Due to widespread terror attacks and cyber-attacks, new regulation is created to censor and control the internet. This causes companies that are reliant on the internet in its current form to be wiped out. The internet and its content are brought under government control, it is possible a mass uprising occurs when internet controls are brought into play, this creates though new opportunities but at the same time significantly restricts freedom of thought, speech and expression. The spread of fake news acts as a perfect catalyst for an “excuse” to control the quality of information on the internet. Studies have concluded that the internet has been the cause of a reduction in human attention spans, and a dilution of specialisation. Price competition has taken a toll on per unit quality. - Mass public defaults of personal debt With the rise in automation eating into the lower end pay scale, the lower and middle class find themselves being made redundant due to a rapidly changing labour market. It is this exact demographic that will find themselves in difficulty keeping up with repayments, as they are currently the most indebted, and with personal debt being at an all-time high, the situation is clearly not sustainable.

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