EDITORIAL BY RON SMITH

Of Black Swans and TurkeysThursday, October 02, 2008 - Ron Smith

In his masterful book, “The Black Swan,” Nassim Nicholas Taleb examines the impact of events that one would describe as highly improbable; things sprung upon us from out of the blue, unforeseen by “experts.” These events are called “Black Swans” because until they happen we humans think them impossible. All swans are white, it was believed in the civilized world, until the discovery of Australia and its resident Cygnus atratus, the Black Swan. A new reality is apprehended.

It’s important to understand, says Taleb that expected things not happening are also Black Swans, and that what we don’t know is far more relevant that what we do know. Consider the events of 9/11. What did we learn from them? We learned how to exert massive effort to avoid another attack by Islamic terrorists on tall buildings here. But we did not learn that “some events, owning to their dynamics, stand largely outside the realm of the predictable.” It’s as though, the author says, we have the wrong user’s manual for our minds.

The reason I bring this up is because what is described in detail in this book is very much at play in the current drama about the worldwide economic slump and credit meltdown. As the United States Senate gussies up a bill that can be passed in the lower chamber, the Wall Street bailout or rescue plan; we again see the inability of “experts” to predict the course of events. If you have a few minutes listen (here) as investor Jim Rogers patiently explains to a befuddled talking head on Bloomberg TV why we shouldn’t follow the advice of Treasury Secretary Dennis Paulson or Fed Chair Ben Bernanke on how to get out of a mess that they repeatedly swore under oath we were not in. Were they lying or were they just lacking the expertise people think they must possess?

Financial markets, like wars, are inherently unpredictable and to pretend otherwise gets us in a lot of trouble. Misunderstanding the links between policy and actions means, says Taleb, “We can easily trigger Black Swans thanks to aggressive ignorance – like a child playing with a chemistry kit.” My own thinking is that this pretty well describes the situation in which we find ourselves right now.

When asked which presidential candidate is best equipped to deal with this market meltdown, Rogers just snorted and explained that neither McCain nor Obama has expressed any coherent thought on this ongoing event, haven’t the slightest idea what’s going on and added that both of them were “turkeys.” Will he vote? Yes, but not for either of the “turkeys,” because to do so merely encourages the powers-that-be to send out more “turkeys.”

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