When Bilal kindly invited me to write ‘something black swan like’ for Macro Hive’s 2023 Grey Swan series, I first took a step back to define what a black swan actually means nowadays.
Over the past years, we have been living through so many extreme tail-end events that we could rightly ask ourselves, do swans come in any colour other than black?
Black swans should be unthinkables. But to think the unthinkable becomes almost unthinkable in itself if such events are happening all around us, all the time. In defining potential black swan events for next year, we should consider events for unpredictability. Let’s ask a few questions:
- Is it truly unthinkable to predict nuclear war after Putin’s repeated and credible warnings that he will use them, tactically or otherwise?
- Is it truly unthinkable that billions, if not trillions, in assets can disappear in the blink of an eye once you have been invested in crypto?
- Is it impossible to imagine that the US will descend into a state of civil war as the former president will be indicted and most probably convicted?
- Is a global property market crash, following a decade of annual, double-digit gains, too improbable?
- Is a Euro break-up, with the ECB finally stepping back, something we should put beyond the realm of fantasy predictions?
- Is the UK rejoining the EU too inconceivable to consider?
However shocking any of these events would be, none are entirely unpredictable.
Now, what event or series of events is truly going to surprise us and will leave many investors completely wrong-footed?
- How about global peace, prosperity and cooperation to solve the big issues the world is facing?
- How about the US and China finding ways to avoid a bipolar outcome where their competition evolves, inevitably, into conflict?
This would be quite unimaginable, wouldn’t it? It would, most certainly, qualify as a black swan for the ever-growing army of doomsday investors, like myself.
But think about it. US President Joe Biden has skilfully presided over providing the Ukraine arms for self-defence while avoiding direct confrontation between the US and Russia. Meanwhile China’s President Xi Jinpin de-escalated Russia’s war efforts by denouncing the use of nuclear weapons and expressing his concerns.
Who would have thought both leaders, with their ripened experience and wisdom, would be capable of guiding the world to a better outcome? Biden enjoyed successful midterms while Xi was endorsed as party leader for life. These two men now enjoy status and mandate to do good as they please. That is quite something and, in my humble opinion, we should not casually ignore it.
Conflict, crisis, destruction, disaster, famine, ageing, pandemics, and climate change will not become things of the past in 2023. Many of these events have been happening all too often lately, and this has nearly exhausted my ability to come up with even more left-tail-distribution black swan predictions for next year.
With that, I like to present that the one black swan event we should most carefully consider for 2023 is global peace and prosperity and an according realignment of our financial markets. Let us define this state of Nirvana in terms more familiar to us financial markets practitioners: S&P 6,000, DXY at 70, inflation at 2% and TY at 1% real. That will do, surely.
After the dreaded events of the past years, I am all up for a massive right-tail black swan event manifesting itself as the big surprise for next year.
May I wish you a very happy and most prosperous 2023. Be ready!
And to clarify…this is not what I think will happen, this is just the furthest right-hand side of the distribution, a true black swan.
What I do think is quite likely to happen is that the Fed will stop hiking with the real FFR still fairly deeply, -1.5%, negative. That will not get us +1% real TY, but it may very well give us S&P at 5,200 or higher.