Andrew Duguay is a senior economist at Prevedere. He wrote an op-ed for CNBC titled “This could be the ‘black swan’ for the economy”. He claims that the ‘black swan’ is consumer spending. Specifically, relatively strong consumer spending has been propping up the economy. Weaker than expected consumer spending might invite a recession.
Duguay is confused about what a Black Swan is, in the parlance of Nassim Taleb. According to Taleb, a Black Swan has three attributes, as outlined in his book:
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Even a passing familiarity with economics would put consumer spending on your radar. I think Duguay’s argument is that most people expect consumer spending to be strong. If consumer spending is unexpectedly weak, we could have problems.
That idea simply is in no way connected to a Black Swan. Duguay should know better. The fact that he doesn’t know better shows why our society is so vulnerable to true Black Swans.
I’m similarly frustrated by misuses of the word “strategy”. I wrote about one specific example of this recently. Sloppy use of the word “strategy” devalues real strategy. When every action is strategic, no action is.
Likewise, we devalue true Black Swans by using that label to describe every event that deviates from consensus predictions. Economies unexpectedly go into recession. Companies unexpectedly miss, or exceed, their financial targets. Commodity prices unexpectedly rise, or fall, when forecasts indicate the opposite.
These unexpected events are routine. A Black Swan isn’t simply unexpected. It’s unexpectable, as Taleb notes when he writes “it lies outside the realm of regular expectations”. But remember the second attribute: it has an extreme impact. A US recession driven by weaker than expected consumer spending won’t have an extreme impact, in the Black Swan sense.
Taleb offers another way to think about Black Swans. Black Swans are events that our models wouldn’t predict. We have tons of economic models that would predict a US economic recession resulting from weaker than expected consumer spending. Because our models can, and do, predict these kinds of recessions, they aren’t Black Swans.
Think of a much less rigorous test, where after an event occurs, you ask yourself: could anyone really have predicted that? And I don’t mean predicting the class of event. I mean predicting the specific event itself.
For example, it’s easy to predict that the United States will face another financial crisis. Our stock market will plummet, and one or more large companies will go bankrupt.
So what? We can describe all kinds of unique events as belonging to the broader class of financial crisis. Predicting that one member of this class will materialize is easy to do. The problem is that the timing, and magnitude, of the specific event matter. A ton.
Likewise, we can predict a weather-related catastrophe. We’re going to have a massive hurricane, or typhoon, or snowstorm, or heatwave, hit somewhere on the planet. It’s going to cause a large number of deaths and cause enormous economic damage. Again, the timing, placement, and magnitude of this event all matter. A ton.
Black Swans are Black Swans because they’re unpredictable. Remember how the label materialized. All we’ve ever seen are White Swans. We have no evidence that we should ever expect to find a Black Swan. But one appears. And our world changes.
A consumer spending-driven economic recession isn’t a Black Swan. Not even close. The CNBC op-ed is just one example of the challenges we face in having a constructive dialogue about true Black Swans.