A Flock of Black Swans – by John Galt

Let me share with you an interesting article from shenandoah, which tries to foresee unexpected events that may come plague the markets.

From the battle lines in Extremistan, the time is growing near for these birds to swarm together as the seasons change once again. So what happens if there is one more than Black Swan event in a compressed period of time? Let’s see what could  threaten this little bubble of joy and happiness that our friends in Bubblevisionland live in and what could trigger the Messiah taking that course of action that Vice-President Biden warned about before his regime took power.

1. Swine Flu Disaster – The vaccine is only partially effective and due to the economic situation, fewer people go to the Doctor, work more and spread the disease rapidly throughout the public in North America. This kills the Christmas retail season, possibly hundreds of thousands of citizens, and turns whatever projected positive GDP numbers into a sinking nightmare. With the weakened state of the nation, productivity plummets, bankruptcies skyrocket, terrorist possibly take advantage of the situation, crime sprees appear off the scale and hospitals are overwhelmed to the point where the military is deployed on a regionalized as-needed basis.

2. Israel/Iran/Hezbollah – Someone overplays their hand. This triggers a massive regionalized conflict and needless to say the consequences of another Israeli war in Lebanon or Iranian retaliation in the Straits of Hormuz creates a new series of issues themselves.

3. Bank Solvency Dominoes Accelerate –  This story from Bloomberg on August 14th caused a lot of people to take pause:

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return 

With this story and today’s news that mortgage delinquencies are at another record with California having 15% of all residential mortgages either one payment late or in foreclosure and 23% of all residential loans in Florida at least one month behind, it does not take much of an imagination for one to consider a huge rash of regional banks failing week after week. Thus far in August we have had Community Bank of Nevada (about an $800 million hit to the FDIC), Colonial Bank ($2.3 Billion hit) and now the second largest bank in Texas, Guaranty Bank (projected to fail on Friday 8/21, cost unknown thus far) along with numerous articles about Corus and hundreds of others and the size and scope of these begins to hit home. If we see a rash of this over the next eight weeks it could trigger consequences the American public is not prepared to accept.

4. Collision of Residential and Commercial Real Estate Crisis Freezes Credit Markets –  Last year all we heard was “it is just a subprime problem” which of course anyone with two functioning brain cells or more knew better. Now we have the rare intersection in history where subprime, Alt-A, Prime, GSE, Commercial and Agricultural properties all failing at an accelerated pace now that the economy is in “recovery” mode. That being the case, this could create an even greater drop if not outright locking up of credit once again stalling any growth and causing the economy to reverse course rapidly and unemployment to dramatically accelerate.

5. Federal Reserve System Instability  – One of the most interesting and over looked stories of 2009 was not the U.S. Supreme Court nomination of Sonya Sotameyer or anyone else within the court system in my opinion, but just who and what strategy will President Obama adopt for replacing the Governors retiring on the board of the Federal Reserve and if Ben Bernanke will be retained or not. This type of speculation was presented recently (Sunday August 16th London Times) in an article from Irwin Stelzer titled Will Barack Obama put his yes men on the Fed board?

Mr. Stelzer points out that there are two vacancies now and that Bernanke’s term expires in January of 2010. By 2011, President Obama could appoint up to 5 more governors creating a permanent legacy of Keynesian pro-centralized planning cronies that would impede any non-statist President from executing policies against their will with little if any opposition. Bernanke’s future and the governors selected could create the type of market instability and uncertainty that those who are prepared can make huge profits, but woe be unto those who fail to realize the implications should this bird elect to land early.

6. Russia v. Georgia –  Still unresolved, still ignored, and quite unstable. One move by Georgia interpreted wrong or further indications of NATO weakness and the Republic of Georgia becomes the CIS State of Georgia overnight. This will give Russia the control over the East-West oil infrastructure that will enslave the continent of Europe for decades to come.

7. “THAT” Wild Card of a Natural Disaster – All it takes is one more Katrina, Rita or major earthquake and we’ll see GDP reverse instantly from bad to suck.

8. Auction Failure –  The brazen attempts by the U.S. to dump it’s garbage on the world and failure to show self control could backfire. All it will take is a huge auction (dollar wise that is) for one of the Government Sponsored Enterprises like Fannie, Freddie, Farmer or Ginnie or even worse a long dated Treasury auction (seven year plus) and that could shake the faith in our system by overseas investors even further.

9. Mexican Collapse –  Between the Swine Flu beginning its migration from South America back into North America as winter becomes spring down south and vice-versa here, the drug wars, communists staying busy, Islamofacist infiltration and their economic situation tied to ours it does not take much of a reach to understand what happens when these collide with our own problems and expand dramatically by splashing into our border regions.

10. The unthinkable U.S. Military Incident – A U.S. military unit of platoon or company size is encircled, cut off, captured and/or killed on video by Taliban terrorists in Afghanistan and the entire incident is recorded on video then broadcast throughout the Arab world via Al-Jazeera. While this seems implausible, that is what a Black Swan truly is, the unthinkable and implausible happening, like Lehman Brothers collapsing or our government taking over private industries. The impact of such an event with the geopolitical frame of reference is staggering and the consequences domestically for the administration and the citizens of the U.S. frightening at best, horrifying for our foreign policy at worst. It would be a body blow that would be most difficult to recover from.

11. Combination of any or all of the above –  God help us should more than one occur in a short period of time but flocks tend to appear at once and without warning. Just remember that for each event that piles on top of the other you are basically multiplying the impact by a larger and larger factor with each impact.

While I realize that these events tail nicely with the other article I wrote last month about the eye of the storm beginning to move, the average reader has to consider that while these events seem remote, it is the low probabilities of all or any combination that makes them so dangerous. Some are political and economic issues, others emotional and scientific thus the risks of mismanagement of an event causing the severity of the impact to multiply by a massive factor which spirals beyond immediate control.

Thus my concerns for the time period of today, August 21st through October 19th or possibly through the end of October. This is not to put a specific date or guarantee that these events will occur but that they can occur and we are totally unprepared for the consequences as a nation. There is no set formula to prevent or measure the severity of the situation thus personal preparation is the order of the day.

Good luck and enjoy the bird watching!

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