China’s White Swans: Preparing for the (Un)Expected?


Say what you will about economist Nouriel Roubini but he does have a valid point when it comes to his more recent work, which revolves around the idea that as interesting as the concept of preparing for black swans may be, white swans also deserve our attention.

Before continuing with this article, we would recommend reading our black swan-related one by clicking HERE and as a brief introduction, black swans are essentially unexpected events which risk turning the world upside-down. Think of them as the opposite of the Brexit situation, one discussed over and over (and over, and over!) again to such a degree that the likelihood of being taken by surprise by something Brexit-related is rather low.

What about white swans?

Right off the bat, we want to make it clear that the Brexit example is a bit exaggerated and should be considered a somewhat extreme white swan example. Broadly speaking, let’s just say white swans are events that are on the radar of pretty much any (at least somewhat informed) market participant and as such, the market will most likely not be taken by surprise by white swan-related developments.

Does this mean white swans are not dangerous?

Most definitely not!

In fact, therein lies the misconception we want to debunk, the idea that just because certain situations represent known factors, they shouldn’t be perceived as threats. Yes, the market had time to wrap its head around white swans and perhaps even price them in to a significant degree but:

  1. This doesn’t mean the situations themselves any less dangerous
  2. Markets aren’t always amazingly efficient with respect to quantifying risks right away and occasionally, they are proven wrong… even brutally so in certain instances

As a general idea, you can imagine a high-speed collision between two sports cars and use that as a metaphor for black swan events on the one hand and on the other hand, you can imagine a slow-motion train wreck and use that as a metaphor for white swan events. While it is true that the two are remarkably different, this fact alone doesn’t provide any guarantees as to one scenario being deadlier than the other. The same way, the sudden onset of an illness can be considered a black swan event (with you and your family caught completely off-guard), whereas the debt-fueled gambling and drug abuse habits of someone you know can be considered a white swan scenario.

Categorizing events in this matter says little about the final outcome. For example, the suddenly-appeared illness might go away just as quickly if treated properly, with the black swan event ultimately turning into a “happily ever after” situation. Or, the same way, your friend with bad habits might ultimately have an “Aha!” moment and turn things around. Then again, the exact opposite might happen… we just don’t know: perhaps both situations will result in long-term disaster, maybe one will have a negative ending and the other a positive ending or, of course, perhaps both of them will have a positive outcome.

As such, a compelling case could be made that black and white swan events deserve to be treated just as seriously, with a few examples when it comes to China being:

  1. The heavily talked-about trade tensions with the United States
  2. The coronavirus/covid-19 situations and its possible long-term effects
  3. China’s role in a potential hot war between the United States and Iran, a topic covered through a dedicated article
  4. China’s role in a potential cold war between Russia and the United States
  5. China’s GDP growth rate slowdown and the effects it might have on its economic as well as socio-political trajectory
  6. The potential economic (and otherwise) effects of China’s demographic problems
  7. A possible escalation of endogenous issues in Hong Kong and/or Taiwan-related ones
  8. A possible escalation of exogenous issues such as South China Sea-related ones
  9. China’s worryingly high debt levels, especially on the corporate debt front (even if it is hardly the proverbial number one game in town in terms of debt)
  10. The seemingly chronic under-performance of China’s domestic share market, one dominated by less than sophisticated retail investors to a lesser degree than in other jurisdictions
  11. Yes, climate and pollution-related issues, with the many ramifications they risk bringing about

Needless to say, it isn’t all that difficult to think of white swans as far as China or pretty much any other nation is concerned, with the previously mentioned list being by no means definitive. However, please understand that our goal here isn’t getting you as a reader of this article to panic. On the contrary, we have explained time and time again that whether we are referring to black or white swan events, panic is always a sub-optimal reaction.

Instead, we have one goal and one goal only: convincing our readers to allocate at least a tiny bit of brainpower toward thinking about scenarios involving white swans. This is most certainly not something we would recommend obsessing over, nor is it an endeavor which is meant to occupy the bulk of your day. Even a few minutes spent researching and “worrying” about white swans each day automatically puts you miles ahead of the average market participant.

The same principle is valid when it comes to the idea of (in our case financial) preparedness in general. Most people allocate pretty much zero energy in this direction and as such, let’s just say the bar is not set remarkably high. In many cases, all it takes is showing up or to be more specific, all it takes is putting in a little bit of effort for you to be much better-positioned than the average individual and/or organization. As always, the team will happily put its experience as well as “brain power” at your disposal so as to enable you to do just that, with us only being a quick message away.

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