The term of “Black Swan” is not uncommon in finance. What does it mean and how can we identify a black swan in the economy?
When is the situation called a “black swan”?
1. What is a black swan?
The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis. Taleb argued that because black swan events are impossible to predict due to their extreme rarity, yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to try to plan accordingly. Some believe that diversification may offer some protection when a black swan event does occur.
2. Characteristics of the black swan phenomenon
As defined by the author of The Black Swan, the black swan phenomenon has the following characteristics:
- Exceeding the prediction, very rarely happens
- Leaving dire consequences if it happens
- Being interpreted as a pre-forecast event after occurring
3. Examples of black swan events
Bubble Y2K
The dot-com bubble (Y2K bubble) in 2001 was a black swan that occurred at the beginning of the 21st century, causing a heavy impact on the US and world economies. At this stage, the Internet system began to develop and stocks of technology companies were heavily speculated.
A series of companies in this field had IPO and their shares skyrocketed. Venture capital funds also invested large amounts of capital into tech companies. The initial stock price rose sharply, causing the stock market indexes to go high in a short time. However, the overshoot and bubble caused the market to crash, the stock market to plummet, and the recession of the early 2000s.
The 2008 Financial Crisis
In 2008, the global financial crisis occurred due to the collapse of the US real estate market. The bursting of the housing bubble led to home loans with insolvent financial institutions. As a result, a series of large financial institutions faced difficulties and even went bankrupt (Lehman Brothers).
The US stock market collapsed with the consequences for other markets around the world. The Dow Jones Industrial Average closed its lowest level since April 1997 on March 9, 2009. The index fell 20% within 6 weeks.
The European stock market also experienced a similar situation. In Asia, the Japanese market, although in a stable period, also recorded the Nikkei index to a historic low in October 2008. Particularly in Vietnam, the VN-Index fell by 70% in the first quarter of 2008, one of the strongest declines in the world.
Inflation in Zimbabwe
The year 2008 also witnessed a black swan phenomenon in Zimbabwe when it reached an all-time high inflation rate of 79.6 billion percent, severely affecting the economy of this African country.
Zimbabwe entered an era of hyperinflation in March 2007. Inflation only ended when the African nation abandoned its currency in 2009. Zimbabwe’s inflation crisis has been the second worst inflation in history, after the hyperinflationary crisis in Hungary in 1946, with prices doubling every 15.6 hours. The most obvious manifestation is that the Central Bank continuously issued banknotes of very high denomination. In January 2008, it issued banknotes with a value of 20 million dollars, and on July 21 was 100 billion dollars.
