Black Swan, uncertainty, contagion, and the coronavirus

The coronavirus is a Black Swan event coupled with growing uncertainty from misinformation, and actual global economic contagion that is turning into perfect storm shock. This rare event is having an impact across markets that will continue to gain steam and cannot be offset by monetary or fiscal policy.  

• A black swan - an unanticipated rare event with extreme consequences that cannot be handicapped by objective probabilities.
• Uncertainty - an event that is not easily measured with objective probabilities.
• Contagion - an event that can have spillover effects across markets and regions.

We do not know what we are dealing with. There is limited history on how to fight or control this virus. This epidemic has the potential to turn into a pandemic.

• The measurement of this epidemic is unclear with information that is limited or actually misleading.
• Information is being withheld which may provide insight on the extent of the problem. Governments may be misleading in order to protect people from the truth.
• The response to the virus by people and governments is large and not always driven by science. This increases the chance for panic.
• The economic reaction is far-reaching in commodities, production, transportation, and supply chains making this a global problem.
• The economic impact from this virus is increasing and the growth shock may not be able offset by more monetary liquidity.

While US equity markets have been reacting new highs, the shock to other markets like energy and commodities is large. This shock requires forward-thinking that suggests a more cautious response focused on principal protection. The heuristic of one good reason decision-making states that conservative positions should be taken.