Don Thurston Blog

A Black Swan or The Emperor’s New Clothes….Is There Any Difference?

A Black Swan is defined as the occurrence of an event which is impossible to predict, has major consequences and after the fact is explainable and was predictable.

The Emperor’s New Clothes is a fable which captures the vane and culpable nature of an Emperor. Con-artists convince him that new attire is resplendent to an extreme and that only those worthy of his leadership will see the vestment. He parades naked amongst his appreciative followers, none of whom draw attention to his condition for fear of being seen as unworthy. A child with no attachment blows his cover, shouting the Emperor has no clothes.

In two thousand and eight two macro activities converged….. asset backed securities and mortgage proliferation. Any student of an introduction to Economics knows that generating a higher interest rate by combining instruments yielding lower rates was impossible. Equally a mortgage industry based on fraudulent practices was destined to fail. The result….a precipitous drop in the world’s economies. A Black Swan or an Emperor?

What about the Fukushima Daiichi Nuclear disaster? Explanations focused on inadequate engineering and safety. However why would one build a nuclear reactor in an earthquake prone area in the first place? The Board Room decision to build is unlikely in the public domain. If there were any dissenting voices looking for location policies, they were drowned out in favor of building for convenience and cost. A Black Swan or an Emperor?

By the year two thousand equity prices for technology companies were way beyond any traditional evaluation metrics…..proponents soon invented new measurements that justified their assessments. As the equity prices declined hiding in plain sight were short sellers taking full advantage of the greater fool theory. A Black Swan or an Emperor?

In nineteen and nineteen an influenza epidemic swept the world, killing millions. This followed on the heels on the most cataclysmic war of all time. Was the spread of the virus preventable? If not, then we had a major Black Swan.

The Exon Valdez, Bhopal, The Madoff Affair, Chernobyl, Enron, tsunamis, global warming are a few more of countless examples that maybe bad luck or self-induced.

By good fortune a Black Swan and an Emperor met at the International Conference of Fortune Tellers and Futurists. A break out session was convened…..the members assigned the task of classifying events according to their origins.

Natural disasters including tsunamis, meteors, earth quakes, volcanoes and floods were quickly pigeon holed as Black Swans. Outcomes magnified however when man made decisions compound the consequences. The tsunami in Japan is a prime example.

The Exon Valdez, Chernobyl, and Bhopal, while unexpected, resulted from bonehead decisions. Nothing natural about them and clearly avoidable. Breakout members did not award them as anything close to unpredictable. Further, the consequences of these calamities were profound.

So what about the financial collapse of the global financial system, the burst of the tech bubble and the Madoff affair?  All man made, all influenced by greed and all had beneficiaries hiding in plain sight.  The victims were, vain and captured by a herd mentality.

By no stretch of the imagination were these Black Swans. Perpetrators had vested interests in sustaining their ventures. The Emperor had everything to gain as he hood winked his disciples by making them feel worthy.

A consummate scam…. an Emperor disguised as a Black Swan. Under cover the Emperor would paint optimistic pictures of any outcome with the only interruption caused by a calamitous event such as meteor collision, an earthquake and so on. Otherwise everything was just fine.

A frequent observation by the victimizer…..what can go wrong?