We often refer to unexpected or difficult to predict ‘once in a long time’ events as Black Swan events. Examples in corporate finance include unexpected events which shook financial markets to their core, such as the Great Depression, the Asian Currency Crisis, the Dot Com Bubble, Sub-Prime/GFC, SARS, Avian Bird Flu and now, potentially, the Novel Coronavirus.

In almost all of these examples, most people lost money at the time, and tragically some lost their lives.

There are other species of Swan where a disaster in one arena creates a positive in another. This is a Silver Swan. For this species we can look to the recent and tragic Brazilian dam disaster which killed and injured hundreds of people and halted iron ore production for Vale’s Feijao mine. At the same time, it put a rocket under the price of iron ore, and as a result of that supply cut the Australian iron ore exporters fired up. This was best seen in FMG’s share price going nearly 3X since January 2019.

Sometimes a Silver Swan can turn back into a Black Swan when infected with an unknown pathogen, such as the Novel Coronavirus. Whilst we don’t yet have a good idea about the biological and financial damage this will ultimately cause, we can already see travel bans and the Chinese shutdown reversing some of the price gains in iron ore, and more generally declines in travel, tourism and consumption. The ripple effect of this particular species may take some time to become measurable.

This hybrid black/silver Avian seems to be something the market has pretty much shrugged off, and although the VIX did increase over 20% last week and the US 3 month/10 year yield curve inverted, tonight the VIX is already down 8%. The NASDAQ just hit an all time high and big tech is flying, so its pretty much business as usual. Tesla just hit $730!

But with all of these Swans circling the lake, why aren’t equities following a sustained bear trend, and why isn’t the VIX a lot higher?

QE Infinity is the reason.

It just doesn’t pay to be out of equities at the moment due to synchronised accommodative monetary policy totaling around US$20 trillion on Central Bank balance sheets, and with negative interest rates in Japan, Germany, Switzerland and Denmark, plus there’s no credible sign that the US Federal Reserve will normalise/lift rates whilst Donald Trump is President. The lack of inflation has become a convenient defence.

And, then there is the Green Swan.

You might have seen this term used recently in the context of unpredictable and uninsurable future climate events. Examples? Droughts, hurricanes, earthquakes and the continuing Australian bush fires.

There are some sobering direct and indirect costs to a warming planet (regardless of the causes) and these include the massive and direct loss of flora, fauna, people and property plus the cost to rebuild. The next cost is the cost to transition away from fossil fuels, which as a proposition is dividing the world at present on almost all levels.

Nonetheless, the Green Swan’s paddling hard, as evidenced in the recent sell-off of the big 5 fossil fuel producers. And, given financial markets appear to regard Black Swans as the new normal, perhaps Green is the new Black?

Or, maybe the frozen lake of QE Infinity is just too cold, even for Swans.

Mike.

NextLevelCorporate is a leading financial & strategic corporate advisory firm with a multi-decade track record that speaks for itself. Helping clients in all industries to prepare for, respond to and deliver transformative corporate finance strategies and transactions in and out of Australia, is our passion.