Cascading Black Swans – 2018

December 30, 2017 By Richard L. Wottrich, Senior Consultant, International Services  There are shadows in 2018 that are contradictory. Central banks are turning off the stimulus spigots at an excruciatingly slow pace. Yet the entire U.S. yield curve is flattening and a steep credit market correction is in the cards. A Danish energy company just issued a 1,000-year bond with a maturity date of 3017, and some corporations are selling negative interest rate bonds. Global stock markets are at record highs, yet extraordinarily low volatility across most asset classes belies investor worries. Total global debt has topped 325 percent of total GDP as government sovereign debt jumps past $63 trillion [Pew Research Center analysis of International Monetary Fund data]. China’s shadow banking assets grew more than 20 percent in 2016 to 64 trillion yuan ($9.8 trillion), equivalent to 86.5 percent of GDP. The U.S. unemployment rate has fallen to a 50-year low, yet wages have hardly budged.  And Congress just passed a corporate tax bill that blows a hole in the U.S. budget. Yet no one seems to be concerned. As Alfred E. Neuman said, “What me worry?” What are the “Black Swan” risks and events that could cause this ‘Alice in Wonderland’ world to collapse. Or is that just foolish worry. Has exploding technology taken the risk out of humanity’s endeavors? This is our take on plausible Black Swan risks on the horizon. Electromagnetic Pulse (EMP) Event  Governments are concerned about North Korea’s burgeoning nuclear weapons program. We however are far more concerned about their ability to create an EMP event, which would detonate a nuclear device in...

Six Mega Trends – 2018

“If you think in terms of a year, plant a seed; if in terms of ten years, plant trees; if in terms of 100 years, teach the people.” – Confucius Charting global mega-trends is perhaps a fool’s errand, but there is order in the fractal universe – if you know where to look. Certain historical currents run strongly and are perhaps not immediately apparent, but nevertheless their impact will be felt in 2018 and beyond. 1. Insurance and Climate Change Zillow recently reported that $400 billion in Florida real estate values could be at risk from climate change by 2100. Property insurers will not be willing to insure real estate unless rates are substantially raised. Homeowners will naturally lower coverages to fit their budgets. Many will move away. Behaviors will change. Meanwhile many homeowners whose homes were flooded by Hurricane Harvey have no flood insurance – they cannot afford it. But a wealthy owner of a $2 million home on Bird Key in Florida gladly pays $25,000 a year for that same flood insurance. That owner knows their claim will likely be in the hundreds of thousands, so the federal flood ‘insurance’ subsidy is a bargain. Right now insurance rates are set on arbitrary vectors, such as zip codes. But risk analysis and big data will fine tune these methodologies and homeowners at the greatest risk from climate change will face enormous insurance rates – many will move. These mismatches in insurance coverage and uneven federal flood insurance subsidies will ultimately be reflected at the ballot box, changing political behavior in favor of working to control and plan for climate...

The Uncertainty Principal

The Uncertainty Principal was first articulated in 1927 by the German physicist Werner Heisenberg. It states that the position and the velocity of an object cannot both be measured exactly, at the same time, even in theory. The very concepts of exact position and exact velocity together, in fact, have no meaning in nature. Only with exceedingly small masses of atoms and subatomic particles does the product of the uncertainties become significant. “Any attempt to measure precisely the velocity of a subatomic particle, such as an electron, will influence it in an unpredictable way, so that a simultaneous measurement of its position has no validity. This result has nothing to do with inadequacies in the measuring instruments, the technique, or the observer; it arises out of the close connection in nature between particles and waves in the realm of subatomic dimensions.” But in the world that is our reality we have ‘observed’ what seems to be the Uncertainty Principal at work when buyers circle a company that may be in play as an acquisition. The very knowledge that buyers are ‘observing’ a corporation as a potential acquisition can cause the target’s ownership to change their behavior. The most common question I receive once an offer has been tendered for a company is, “What should we do now?” The correct answer is that ownership should run their business as they always have, but in practice this often isn’t the case. In one case a private seller injected personal cash into the business to meet cash-on-hand requirements, which in turn influenced the purchase price upwards based on the EBITDA multiple being paid. Once it is clear that...

Giants

Alfred Stieglitz posing in front of a painting by Georgia O’Keeffe, as taken by Ansel Adams, New York City, 1939, as photographed at the Booth Western Art Museum in Cartersville, Georgia,...