On more than one occasion here at ChinaFund.com, we have made it clear that while let’s call it linear (economic) threat analysis certainly has its merits and while there is absolutely nothing wrong with looking at the most obvious threats, black swan events deserve our attention as well and Qasem Soleimani’s death is an example of something which can represent just that (again, however, “can” is the operative word, there are most definitely no certainties).
Hard to tell.
The bottom line is this: the worldwide economic system is far more fragile than asset prices indicate, asset prices which have been inflated by a low to the point of even negative interest rate environment, successive rounds of monetary easing and an overall abundance of (more or less moral hazard-laden) capital, and it is in our view crucial for the average investor to pay attention to… well, to the possibility of “the unexpected” (black swan events, to use a term popularized by Nassim Taleb through his “Incerto” series) bringing about the very economic reset which has been “predicted” ad nauseam over the past 10+ years to such a degree that the very idea of financial preparedness has been discredited by the successive failed doom and gloom predictions.
While more and more investors believe that unprecedented abundance has been brought about by monetary visionaries and that we are in a “new paradigm” situation, the ChinaFund.com team would strongly recommend being even more vigilant with respect to identifying potential threats in such a climate: as the quasi-axiomatic but oftentimes misunderstood saying goes, being fearful when others are greedy and greedy when others are fearful is in our opinion the operative approach.
To understand why potential black swan events such as Qasem Soleimani’s death can bring about economic turbulence, it makes sense to analyze examples of the exact opposite, situations which have been discussed/debated so much that the market has been essentially “numbed” for lack of a better term:
- Greece potentially leaving the Eurozone or even the European Union altogether, a topic which was initially quite “hot” but which has been discussed so extensively over a very long period of time that even if it would have occurred, the shock factor would have not exactly been there
- The Brexit situation, once again a dramatic and shocking one back in 2016 after the (in)famous Brexit vote but a topic of which the markets became more and more bored after many (!) failed negotiation attempts
- Japan’s aggressive monetary policy, something that seemed quite exotic when nobody else had embarked on that particular journey but in today’s landscape of monetary free lunches, again… the shock factor is most definitely gone
Is the risk of the worldwide economy being brought to its knees by examples such as the previously mentioned three zero?
Most definitely not.
Our argument, however, is that at least the market had more than enough time to properly digest them and as such, the likelihood of the shock factor bringing about instant panic is remarkably lower than should the UK let’s say have left right after the vote, should Greece have decided to leave the Eurozone/EU right from day one and so on.
For this reason, the ChinaFund.com team tends to fear black swan events more so than situations which have received extensive coverage. Not because a highly-discussed situation is no longer negative just because it has received widespread exposure (that is definitely not the case) but rather because we would much rather deal with the proverbial evil we know and can quantify than that which is lurking around the corner, waiting to take the market by surprise.
Now that it should be clear what we mean by the potential black swan dimension of Qasem Soleimani’s assassination, just how devastating can this particular event be?
In our view, Qasem Soleimani’s death is the type of event where everything depends on what happens next, it will literally make the difference between something that stays in the headlines temporarily but then quickly leaves the collective attention sphere and something that risks bringing about a crisis… economic or otherwise. Also, the timing is very much up to debate, as nothing “has” to happen right away.
To put it differently, it’s the type of event which, should it be followed by a “perfect storm” set of additional ingredients, can easily be seen as an “obvious” cause of whichever crisis it caused… in hindsight. We are still pretty much in the middle of it all and as such, at the end of the day, your guess is as good as ours.
Through the many articles we have written here on ChinaFund.com, we hope we have made it clear that we do not believe in predicting but rather in preparing.
If your portfolio is ready for a “big reset” situation, it matters little whether it will be brought about by Qasem Soleimani’s death directly, by its consequences/ramifications or by something completely different. Therein lies the key to understanding how we choose to do things: the name of the game is putting together a strategy that enables you and/or your organization to land on your feet under a wide range of scenarios.
Can a geopolitical black swan event bring about an economic calamity? Yes.
Can an economic black swan event bring about an economic calamity? Yes.
Can a natural disaster-related black swan event bring about an economic calamity? Yes.
… the list could go on and on.
No matter which event(s) we are referring to, the name of the game is understanding that you have no control over it or them. What you do have (complete) control over is your asset allocation strategy, regardless of how much exposure you want to have to Chinese assets or if you even choose to be exposed to this asset class at all. Some investors consider black swan events frightening, others perceive them as yet another piece of their wealth management puzzle. Needless to say, the ChinaFund.com team is positioned far closer to the latter and should you be in need of assistance so as to join us, we are only one message away.