Black Swans back with a vengeance
CHAOS theory reigns supreme. That is one of the most powerful lessons in life: unexpected events always tend to derail even the best and most carefully thought out plans. We have seen three major disruptions to the received wisdom in the past few days; all will have severe consequences.
The first was the outcome of the election debates on Thursday night: Nick Clegg’s victory has taken on a momentum of its own and threatens to destroy both the Conservative Party and the entire British constitutional settlement. The second is the cloud of volcanic ash: we have suddenly woken up to the horrible realisation that a volcano in Iceland can cripple the airline industry, disrupt freight, halt commerce and put in question the easy movement of people we have all come to expect. The third was the SEC’s decision to accuse Goldman Sachs of fraud on Friday, a move timed ahead of the firm’s results this week and aimed at forcing through a much harsher than expected regulatory crackdown on Wall Street. In all three cases, complacent markets have been caught off guard – and in some cases have still not understood the magnitude of what is happening.
Today’s YouGov poll for The Sun is the first that hasn’t had a Tory lead since October 2007 and the first that has had the Lib Dems ahead since modern polling began. The Lib Dems are on 33 per cent, the Tories on 32 per cent and Labour on 26 per cent. This has the potential to turn into a cataclysmic event and change politics for ever. A uniform swing would give the Tories 251 seats; Labour 230 and the Liberal Democrats 137. There would be a hung Parliament, a Labour-Liberal coalition with Gordon Brown as prime minister with Nick Clegg’s support, in return for a full proportional representation parliamentary system. This would terminate the Labour/Tory duopoly, splinter the vote and open Parliament to all parties, including socialists, the BNP, Greens and Ukip.
The volcanic ash fiasco shows us how vulnerable we still are to freak natural conditions. For the EasyJet generation, and for retailers and manufacturers reliant on air cargo for their just in-time-deliveries, this is a shock to the system – and one for which there is no easy solution.
The SEC’s decision to accuse Goldman Sachs of fraud shattered the widely held view that a new, relatively reasonable settlement was going to be struck between politicians and the financial system. The reasons for this belief were three-fold: the bonus super-tax has run out in the UK; governments’ stakes in bailed-out banks are increasingly in positive territory; and the financial system is working again. But US politicians are now seeking to emulate not only Franklin D Roosevelt’s New Deal, including Glass-Steagall, but also the interventionist economic reforms of Theodore Roosevelt and Woodrow Wilson, which famously used anti-trust laws and other heavy-handed measures to rein in and attack powerful firms. The Goldman move may just be the start.
All three stories qualify as Black Swan events, to use Nassim Taleb’s phrase – an unexpected event of a large magnitude with important consequences. Nick Clegg’s surge and the Goldman prosecution ought to have been more predictable than the volcanic ash eruption – but that, perhaps, is the point: Taleb explains that we always rationalise surprises after the event, making them seem as if they were always obvious possibilities. When will we learn?
allister.heath@cityam.com