Fruitlessly Searching for Black Swan Events

Black swans…white swans…and big, nasty birds…

The weather is beautiful here in Paris. The sun is shining. People are returning to sidewalk cafes. Trees and flowers are beginning to bud out and bloom. Early spring in Paris can be delightful…or horrible. Be sure to pack a warm sweater and a coat…and hope you don’t need them.

Prepare for the worst; hope for the best. That is our unofficial motto, here at The Daily Reckoning.

Dow plus 178 points yesterday. Oil over $100. The euro is rising (dollar falling). Gold is back at $1,426.

And Warren Buffett is the latest to get on board with our Trade of the Decade – or at least, half of it.

Warren likes the buy side. Buy Japan, he says. It’s cheap.

But watch out, Warren; the yen is not cheap. You could win on the stocks…and lose on the currency.

That’s why we covered both sides in our Trade. Buy Japanese stocks. Sell Japanese bonds. And be prepared to wait.

Warren’s recommendation is typically positive and upbeat. He thinks the worst is passed in Japan. He’s now hoping…and expecting…better times. Japan’s stocks are a good deal, he says. You get a lot for your money. Things will improve.

Our view is not exactly cynical, but we don’t think the disasters are finished in Japan. We prepare for the next one.

“What,” asked an astonished French colleague. “They’ve had the biggest earthquake ever…the biggest tsunami ever…and a nuclear disaster too? What else could happen…a giant meteor?”

Our friend Nicholas Taleb has added “black swan” to the vernacular. Lately, there are so many of them, we barely have time to recover from the excitement of one black swam before another one bites us on the derriere. There seems to be a whole flock of them.

A reporter recently asked a popular analyst “what black swans do you see on the horizon?” Daily Reckoning readers will recognize the absurdity right away. A black swan is something you can’t anticipate. It doesn’t present itself as a possible problem, on the horizon. You can’t see it. Instead, it comes out of the blue, a problem you didn’t imagine at all.

But now, the whole world is wasting its time looking in the bulrushes for more black swans.

They would do better to examine the feathers of those snow-white birds in front of us. They’re imposters. They’re frauds. They’re white swan impersonators. They’re really gray, nasty swans…with mean tempers and prone to sudden acts of violence…

What do we mean?

Well…glad you asked.

For one thing, there is QE2…swimming around…with a bright, new coat of white paint. Here’s the latest from Bloomberg:

Bernanke in Testimony Can Show Ron Paul How QE2 Works in Markets

The next time Federal Reserve Chairman Ben S. Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working:

The Standard & Poor’s 500 Index of stocks has climbed 18 percent since he said Aug. 27 that additional asset purchases might be warranted.

The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show.

Inflation expectations have jumped by 44.4 percent.

The unemployment rate has fallen to its lowest level in almost two years.

So much for 2008 Republican vice-presidential candidate Sarah Palin’s assertion that the “dangerous experiment” wouldn’t “magically fix economic problems.”

Maybe Bloomberg has its tongue in its cheek. Or maybe it really thinks QE2 is a great success. But the jump in inflation expectations is not necessarily a good thing.

Yes, stocks are up. And yes, so are junk bonds. You put in $100 billion per month; you have to expect something to happen. But what we see is an increase in speculation – and some bouncing around on the hard pan of a Great Correction. And yes, unemployment – as measured by the Labor Department – is down to its lowest level “in almost two years.” But 2009 was hardly a good year for jobs. And there are still 7 million fewer jobs today than there were before the Great Correction began in ’07.

No jobs; no income. No income; no shopping. No shopping; no real growth in the consumer economy.

The swan painters say Bernanke’s QE2 has boosted stock prices (right!)…and that higher stock prices increase Americans’ wealth (right again)…and that wealthier people will buy more, leading to real GDP growth (uh…not quite).

Relatively few people own stock portfolios. Those who do are aware that stocks go up and down. They’re buying stocks, but they aren’t necessarily convinced that this wealth is spendable; it hasn’t been around that long.

Meanwhile, far more people own houses than stocks. And houses are going down. Here’s the news from Reuters:

Sales of previously owned US homes fell unexpectedly sharply in February and prices touched their lowest level in nearly nine years, implying a housing market recovery was still a long off.

The National Association of Realtors said Monday sales fell 9.6 percent month over month to an annual rate of 4.88 million units, snapping three straight months of gains. The percentage decline was the largest since July.

The median home price dropped 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002.

“If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market,” said NAR chief economist Lawrence Yun.

Let’s see, nearly an entire decade of house price gains have been wiped out. Now one out of 7 houses in Nevada is empty! And next month begins the next big wave of resets, recasts, and foreclosures.

Is QE2 a happy, nice, white swan? Could it have a black heart? Maybe this swan is harmless, but we wouldn’t get too close.

We’ll return to this tomorrow…and to Japan, which faces a Godzilla bird of its own…

Bill Bonner
for The Daily Reckoning

The Daily Reckoning