From Brad Hoppmann: In his 2007 book, “The Black Swan: The Impact of the Highly Improbable,” Nassim Nicholas Taleb gave the world a unique term to describe extreme outlier events.
Ones that were nearly impossible to predict, and that had a disproportionate role in shaping society.
We have seen these kinds of black swan events in the markets for many years. The Wall Street Crash of 1929 and the Great Depression … the dot-com bubble bursting … and the fall of Lehman Brothers in 2008 that led to the Great Recession.
These events, as significant as they are, were basically unseen by the masses and the experts. In other words, not many had predicted the events and/or the succeeding fallout.
Today, there are two new terms being bandied about by market observers that borrow from the original black swan concept.
The first is known as a “gray swan,” and the second is something I call an “orange swan.”
Gray swan events are the subject of a recent note to clients from securities firm Nomura. It defines the term in the following fashion:
“These are the unlikely but impactful events that, in our opinion, lie outside the usual base case and risk scenarios of the analyst community.”
In that note, Nomura outlined 10 gray swans watch for in 2017. Here’s a quick look at a few of the ones I found most intriguing.
A U.S. Productivity Boom
According to Nomura, global productivity has been anemic since the 2008 global financial crisis. And its base case is for U.S. productivity to remain on the low side in the years ahead.
However, there’s been a lot of investment in intellectual property and R&D in recent years. So, Nomura argues that this could provide the foundation for a productivity surge similar to what we saw during the tech boom.
This outcome would obviously be bullish for stocks. It also could lead to more aggressive monetary policy tightening by the Federal Reserve.
Speaking of the Fed, here’s another potential gray swan that could take flight …
The Fed Gets Muzzled
The Fed has played a major role in the markets and the economy since the 2008 crash.
But given the president-elect’s vocal criticism of the central bank, there could be what Nomura calls the “possibility of radical changes, potentially including altering the Fed’s mandate, such as changing the inflation-targeting basis.”
Does this suggest a potential return to the gold standard? I doubt it, but even the possibility of a market and economy less dependent on the whispers of Janet Yellen & Co. would probably be a good thing.
Paper Money Disappears
We’ve written several times about the moves by some governments to curtail the use of paper money. Most recently, we wrote about India’s moves to put the kibosh on cash.
Nomura looked at the issue of cash and its future. It thinks we could be “on the threshold when secure, decentralized electronic money and payments systems could replace notes and coins in circulation.”
Analysts at Nomura think that policymakers in developed markets with negative interest rates, i.e. Europe and Japan, may move the cash issue in that direction.
The reason why is because people with money in the bank can just decide to take it out and store it at home. Therefore, they would avoid incurring the cost of negative interest rates.
Now, as interesting as these, and the other, gray swan predictions may be, there’s another type of swan event that we’ve been speculating on here at Uncommon Wisdom Daily.
We call it the “orange swan,” which is a reference to the hue of President-elect Trump’s inimitable coiffure.
An orange swan is an event that takes place as a result of the decisions, policies and even the occasional tweet by Donald Trump and the incoming Republican administration.
The most-obvious orange swan is the potential renewal of sorts in sectors such as industrial, construction and building materials following a proposed $1 trillion infrastructure spending plan.
The president-elect has made it clear that this spending will be a top priority of his administration. And this could be the orange swan that gets many stocks in those aforementioned sectors going.
Another orange swan is a potential stepped-up effort to defeat the Islamic State, which means a military buildup and more defense spending.
Such action would likely be a boon for military contractors and other defense stocks. That’s because munitions makers, aircraft suppliers and military technology companies would be called upon to join the effort.
To take advantage of this orange swan, take a look at the iShares U.S. Aerospace & Defense ETF (ITA), an Exchange-Traded Fund that holds the biggest and arguably the best, publicly traded defense stocks.
Finally, there’s the orange swan that I call “orange animal spirits.”
This is the sense of optimism, growth expectations and general sense of renewed confidence investors seem to have now that Donald Trump has been elected.
These animal spirits have sent the market up about 7% since Election Day. And that move has resulted in a string of new, all-time highs for the major indices.
Will these orange animal spirits continue in 2017? Our guess is yes, and that means opportunity for investors in the year ahead.
This article is brought to you courtesy of Uncommon Wisdom Daily.