Lions eat Black Swans
There was a period there after the crashes of 20o7 when everyone started talking about “Black Swan events.” These were random events happening out of the blue that take everyone by surprise.
It was suddenly all the rage to talk about Black Swans. According to the hype, we were now living through one of these Black Swan events . (Even ACT's Heather Roy got caught up in the hype, before one came up and nipped her in the arse.)
But guess what, people. The crash, the recession, the credit crisis … none of these were Black Swans. A Black Swan event is something truly random and unable to be foreseen. And plenty of people did foresee the crash; they just weren’t listened to. Then, or now.
Commentator John Mauldin reckons a more apt analogy is Lions in the Grass—dangers apparently unseen but which with sufficient foresight can be foreseen.
It is natural to the human condition to focus on the apparent dangers in front of us. That is part of our evolutionary heritage from the time when humans were first dodging lions and chasing antelopes on the African savannah. But we soon learned that if we were to survive it was not enough to walk away from and around the lions we could see. We also had to make sure we didn’t walk into a lion hidden in the grass. It is the hidden lions that can spring on us suddenly and take an arm or a leg.
While most may not spot them, a hunter or an antelope grows adept at spotting the lions hidden in the grass. * So too do those trained in more rational economics than is doled out at most universities.
As Frederic Bastiat noted, it is the skilled economist who looks for the effects that are hidden, the surprises that are unseen. It should be a habit to look at the potential second- and third-order consequences of what we can see happening before our eyes. That way, we not only avoid the lurking lions, we also turn what would hunt us and do us harm into the hunted. Sometimes, the dangers themselves can be turned into a very nice trophy indeed, if you can see and respond in time…
Everyone now knows that there are lions roaming all over Europe… but the lion that lies hidden in the
European grass is France…
France is the imminently sick man of Europe, even without Hollande at the helm—and arms and legs (ad fortunes) are going to be lost betting against it, reckons Mauldin.
Mauldin has another analogy too. One he reserves for disasters so imminent only folk with “the economic understanding that God gave a goose” could fail to see them. And he reserves this analogy for Japan.
Japan is a bug in search of a windshield – but it keeps dodging. Japan has a debt-to-GDP ratio that is approaching 230% (at a rate of increase of 8-10% a year!). The savings rate is declining rapidly and will soon go negative. At that point, the thought is, Japan will need to seek out foreign investors to buy its bonds. And who will buy a Japanese bond at 1% for ten years? If rates rise only 2%, then Japan would be spending almost 80% of tax revenues on just the interest on its bonds. I would submit that that is not a workable business model.
The question with Japan is not, “will this bug hit the windshield?” That disaster is unavoidable. The real question now is “what happens when it does?” This (to really mix metaphors now) is the real Lion in the Grass.
Because at this point you need more than just economic nous—you need historical knowledge.
What will happen when Japan melts down—a resource-poor country in a world in which borders are being closed and resources are more difficult to buy? Will it hunker down and accept the fate it has delivered itself. Or will it do, or try to do, what it’s done before? Historian Scott Powell puts the question:
As its economy falters and its demographic situation becomes desperate in the 21st century, how will its bankrupt government and people react? A distinct possibility exists that Japan will return to being one of America’s [and NZ’s]greatest enemies.
These are questions that can only be answered with knowledge of what’s gone before. Which is why I’d encourage you to look at signing up to Scott Powell’s online Japanese History course—for which Mauldin’s newsletter quoted above is assigned reading.
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* Can you see the “hidden lion” in the photograph above? Give up? Then head to John Mauldin’s newsletter for the answer.