The black swan sequester
Everyday, we are treated to a new peril: Today we have sequestration, a word not much in anyone’s lexicon until recently. The mandated cuts to the federal budget, $85 billion by last count, will further stunt anemic economic growth, or so economists and the Congressional Budget Office guesstimate. The prognostications surrounding the sequester have been grim, with White House Chief of Staff Denis McDonough warning of a “devastating list of horribles,” ranging from severe travel snafus to the end of vital education programs.
In the political media, in Washington, and in the defense industry (which will see especially draconian cuts), all of this is Big News. But after months of buildup, the end-of-days drama is ending with a resounding thud. The meh reaction of financial markets of late is particularly telling (the Dow flirted with its all-time high this week). Markets are mood rings, and the mood now is one of boredom and fatigue. Even the New York Times led page 1 not with the sequester but with a studied picture of a nun saying goodbye to the retiring pope.
This is a good thing. Since the housing market imploded six years ago, we’ve been suffering from black swan fever. When Nicholas Taleb penned his passionate polemic about the inability of financial markets to allow for unanticipated and rare events (“black swans”), he did us all a great service in highlighting the narrow-mindedness that can have dire consequences.
Then the pendulum swung too far. Instead of complacency about rare, destabilizing events, the markets, the media and the politicians developed a fixation: Find the next black swan. That has led to a belief that any sign of stability, any indication that the worst may have passed is simply a false dawn. Luckily, that skittishness has passed.
Yes, financial markets have been in a holding pattern of late. But if what is happening now had happened in the past few years, the markets would have been roiling. Flat markets now are a good sign.
This week alone, Italy’s elections did not go as many outside of Italy would have hoped, but the markets shrugged. Instead of ushering in a center-left coalition committed to austerity and labor market reform, there was an indecisive result whose main winner was a professional comic whose message is throw-the-bums-out. Later in the week, the official Italian unemployment figure was announced as close to 12 percent and economic activity contracted more than expected.
With the week bookended by renewed concerns about the eurozone and the sequester, you would have thought markets would easily slip into a panic that has been all too familiar of late. They have not.
In fact, during the past three years of rolling crises, equities and bonds have been on a quiet tear. Since May of 2010, the S&P 500 is up nearly 40 percent, and there has been a boom market in bonds as yields have fallen globally. That has not helped people who put their retirement income in government bonds or money markets, at least not directly, but it still demonstrates the disconnect between the climate of fear that has suffused our economy and political life and the relatively stable bull market that has been chugging along at the same time.
Markets, of course, are easily mistrusted. The frequent response if and when the strength of financial markets is noted is to dismiss them as a) irrelevant to the real economic lives of most people and b) artificially and hence temporarily inflated by central banks around the world pumping easy money.
These rejoinders reflect both long-standing and sometimes justified anger at the way financial markets have imperiled global prosperity repeatedly over the past century. But they also reflect a black swan culture that has rejected any metric that doesn’t reflect crisis, and thankfully, that culture appears to be waning. Each new crisis in the last few years – Greece will leave the eurozone; China will implode; the U.S. will default; debt will destroy us – has fueled panic. But the whole point of black swans was that they are rare and unforeseen, not that they are common, frequent and easy to identify. Markets, media, politics, the blogosphere, etc. have been so gripped by that fever that each new challenge is perceived not as an issue to confront but as a crisis about to derail us.
The end of crisis culture doesn’t mean we should cease being vigilant about risks, but it is a needed and healthy shift. Crisis and panic are not optimal states for addressing problems, which may be why Washington remains incapable of actually addressing problems. Washington, however, is not the end all and be all of American life, especially not of economic life. There is life outside the Beltway, not just in the United States but in thriving economies around the globe, that do not revolve around the desiderata of the beltway. The dynamism that abounds – whether in Silicon Valley or São Paolo, whether in Hong Kong or Austin – is one reason so many companies have been faring so well, and in part why financial markets have been quietly booming.
You can object to that rationale, as many certainly will. You can claim the game is rigged, that the few are benefitting to the exclusion of the many. Some of that is true, but only some. We’ve been stuck in a time when the only story told or deemed credible is the anxious one. We’ve been gripped by black swan fever. At last, perhaps, the fever has broken.
PHOTO: A black swan and flamingos are seen in their snow-covered enclosure in Jerusalem’s Biblical Zoo January 10, 2013. REUTERS/Ronen Zvulun