Can we forecast the future? Models try forecasting the future to measure and manage the risk, but Nassim Taleb argues that unforeseen events are hard to predict. He calls them Black Swan events. In his book The Black Swan, Nassim Taleb describes the term as an event or occurrence that deviates beyond what is typically expected.
Per Nassim Taleb, a Black Swan event has three criteria:
· The event is a surprise.
· The event has a major impact.
· After its first recording, the event is rationalized as if it could have been expected.
The world has seen various black swan events that affected lives, economies, and financial markets. The 9/11 terrorist attack was a Black Swan event that led to NYSE losing 1.4 trillion dollars in value. The 2008 Global Financial Crisis was another event that drove the Global Economy into depression. It was compared to the 1929 Great Depression due to high unemployment, and as a result, 10 trillion dollars were wiped out in the global equity markets. European Sovereign Debt Crisis in 2009 and Brexit are other examples of the Black Swan events that affected the Global Economy.
Is COVID-19 a Black Swan event? The answer is yes, it is. Chinese Health officials first disclosed a cluster of Coronavirus cases on December 31, 2019. Cases rapidly advanced and spread over the world, causing fear and carrying the global economy to a halt. Perhaps some safety measures were not implemented quickly enough to stop or slow the spread of the virus. It could have been better if borders closed sooner and large gatherings canceled to limit the exponential growth of the virus.
The below-animated map demonstrates how confirmed COVID-19 spread rapidly from 01/12/2020 until 03/01/2020.
Once the first case of the virus was determined outside China, the infection increased exponentially which created anxiety in society; therefore, it affected global economies and markets tremendously.
The above charts show the spread of the virus exponentially in different countries. Infection created panic among investors that each day is a new threat bringing more countries to a halt and damaging the global economy. The Dow Jones Average plummeted with fear that global efforts would not successfully stop the infection. The index was at 29219.98 on February 20th before the sell-off started and slid down to 18591.92 on March 23rd.
Economist Robert J. Shiller discusses that COVID-19 has brought about two pandemics, not just one. The first is the COVID-19 health pandemic, and the second is the pandemic of anxiety over the economic consequences of the first. He is certainly correct, as the rapid worldwide spread of coronavirus and the economic implications of the outbreak have triggered the biggest weekly stock market rout since the 2008 financial crisis, wiping $6 trillion off global equities.
Recession is imminent as the global economy comes to a halt. The services, tourism, and airline industries are the hardest hit, and unemployment is rising. People fear the future because there is uncertainty about when the pandemic will end. Depression will be on the horizon if the recession continues for a prolonged time, or perhaps John Galt achieved to stop the motor of the world.
Disclaimer:
My writings and opinions are my own. They are not the views of my employer. I am not a financial advisor, investment adviser, and broker-dealer.
I have no access to non-public information about publicly traded companies. Information on this blog is based on my own opinion and experience and should not be considered professional financial advice.
Ideas and strategies used on this website should not be used without consulting a professional investment advisor / financial planner. Always do your research before investing.
Sources:
https://data.europa.eu/euodp/en/data/dataset/covid-19-coronavirus-data
https://www.dw.com/en/coronavirus-and-the-economy-world-clearly-in-recession-imf-says/a-52943601
https://www.stock-options-made-easy.com/black-swan.html
https://www.washingtonpost.com/business/2020/02/28/12-days-that-tanked-markets/?arc404=true
https://www.weforum.org/agenda/2020/03/economy-covid19-coronavirus-markets
https://en.wikipedia.org/wiki/2019%E2%80%9320_coronavirus_pandemic
The Black Swan – Nassem Taleb
Bilgin Demir 
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