Where are the white swans?

By now, everyone knows that the Federal Reserve (or, FOMC) dropped the use of words, ‘considerable period’ from its press releases. Also, most people know that ‘patient’ means that the FOMC will not hike rates for the next two meetings. So, the earliest possible opportunity for raising rates is June 2015. At the same time, FOMC said that it was watching international developments. That is a change to its press release from the statement issued after the December meeting. Further, it changed some adjectives – from solid to strong, when it referred to employment growth. Hence, on balance, one must conclude that the FOMC statement after its January meeting tilts towards the so-called hawkish side, if only marginally.

Therefore, I must concede that the direction of change in FOMC’ intent –as revealed in the statement – is in the opposite direction to my views. Nonetheless, I hold on to the view that the FOMC would not be hiking interest rates in June but come up with reasons as to why it would not do so. I could be wrong. As Bill Gross had written recently, the FOMC might hike the Federal Funds rate to 0.5% by the end of the year, to save capitalism. Let us see.

As for Black Swan events, most commentators see a Fed tightening as one. But, many Black Swan events have happened. QE policies are themselves Black Swan events. Negative interest rates are Black Swan events. Look at the website of the National Bank of Denmark. The interest rate on Certificate of Deposits is -0.5%!

One does not have to associate the ‘Black Swan’ tag only with negative developments. Any development that catches us unaware or unprepared is a ‘Black Swan’ event. Central banks trying to underpin asset markets over the last quarter century are doing ‘Black Swan’. Central banks never targeted asset prices. Even now, they do not say that they do so. But, they do. What it has done is to make us forget our learning about investing – it is both return and risk. Investors being focused only on returns and savers being forced to take on risk that they do not understand or cannot bear are ‘Black Swan’ events.

If anything, there are only Black swans all over the place. The worlds of central banking and investing have been turned upside down. The question to ask is this: ‘Where are the white swans?’

But, if we still insist on associating the ‘Black Swan’ tag with negative developments, let us remember that it is not just about the US Federal Reserve raising the Federal Funds rate by 0.5% to 1.0% this year because of, say, wage inflation. It could be a big devaluation of the Chinese yuan. It could be about events in Ukraine spiralling out of control, despite the best efforts of both sides (NATO + Ukraine and the Russians) to keep it just simmering. We understand that Greeks are now on the side of Russians. It could be that financial markets are roiled by some risky bets made by investors gone horribly wrong — a replay of LTCM?.

Now, if investors wake up from their reverie or induced slumber and start to appreciate that they have been taken for a ride all along – in the last quarter century and, more so, in the last five+ years, that would be a ‘White Swan’ event.


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