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Posted: December 01, 2010

Beware the Black Swan

Financial meltdown dealt a blow the economy is still trying to shake off

Mike Cote


If you should encounter a black swan, do not be mesmerized by its elegant, otherworldly beauty, its majestic ominous grace.

Shoot the dang thing, would you?

Just a thought.

"Black Swan Rising" was the theme this year for economist Bill Greiner's 2011 outlook at the ColoradoBiz Top Company trip to Napa Valley in October sponsored by UMB.

Greiner, president of UMB's Scout Investment Advisors, borrowed the idea from Nassim Nicholas Taleb's 2007 book "The Black Swan." The title refers to unexpected, game-changing events such as the rise of the Nazis in Germany and the 2011 terrorist attacks in the United States. It alludes to the discovery of black swans in Australia by British colonists, shattering the belief that all swans were white.

The financial meltdown of 2007 to 2009 qualifies for membership, Greiner says. And such meltdowns may be more than an anomaly, Greiner suggested.

"The frequency of black swan events occurring in the financial markets is accelerating and becoming much more common than was the case for a number of decades," he said. "It leads one to ask the question, why is this happening?"

Back in 2007, Greiner dubbed his economic outlook "The Long, Hard Slog," warning of tough times ahead. But the problems were far deeper than he or anyone else could have expected.
Now that we're living with them, expect a long, slow climb from the muck, not that you didn't already know that. The prediction by economists for this past year - Greiner's team called for growth between 2 percent and 3.5 percent - barely cracked the low end. That's not enough to drive job growth and a sustained recovery that feels, well, like a recovery. Unemployment nationally remains close to 10 percent; while in Colorado, it hovers slightly above 8 percent.

"Traditionally, you'll see two or three quarters coming out of a recession, where real (gross domestic product) growth is somewhere between 7 and 10 percent," Greiner said. "This time around, we didn't get that, and we're not going to get that."

The sluggish growth has dampened the spirits of business leaders in Colorado. After recording two consecutive quarters of growing optimism in the state's economy, the Leeds Business Confidence Index showed a decline in expectations in October, dropping to 48.6 from 54.8 the previous quarter. An index below 50 represents negative expectations.

"Overall, business leaders are saying that they still believe Colorado is doing better than the nation as a whole from their perspective, but that isn't leading to the kind of results that we would hope for, which is more hiring and more investment in capital," said Leeds School economist and Business Research Division Director Richard Wobbekind, who conducts the quarterly survey.
"Business leaders told us they are following two indicators very closely - hiring numbers and consumer confidence," Wobbekind said in a statement released with the report. (The CU economist was scheduled to release his 2011 economic outlook in December after ColoradoBiz went to press.)

Although the short-term outlook calls for more of the same - low interest rates, low inflation and high unemployment - Greiner expects the United States will remain out of recession. But with the growing power of developing nations like India and China, the United States won't be leading the economic charge over the next few years, Greiner predicted. Emerging markets generated more than 31 percent of the world's economic growth in 2008, compared to 21.5 percent in 1998, he noted.

And in the years ahead, we might 
get another black swan, so adjust for 
the possibility.

"If you recognize why black swan events are starting to happen more frequently in the economic system then you can try to do some things better, guard against them and really turn them into offensive opportunity moments rather than looking at them as something to fear," Greiner said.

On second thought, forget about shooting the bird. We forgot to mention that a black swan could be a positive game-changing event, such as the widespread adoption of the personal computer or meeting your spouse for the first time.

Never mind the PC. Here's looking for the power of that unexpected embrace.
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Mike Cote is the former editor of ColoradoBiz. E-mail him at

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Readers Respond

"Back in 2007, Greiner dubbed his economic outlook "The Long, Hard Slog," warning of tough times ahead. But the problems were far deeper than he or anyone else could have expected." I have to disagree. Many expected these problems, and some are pleasantly surprised that the real misery has not yet begun. From around the turn of the millenia, I have been expecting a cataclysmic economic meltdown. The scary part is that it has not yet happened. Anyone from the Austrian school of economics has known for decades (as their predecessors have known for centuries) that all economic systems built upon a system of fiat currency end in disaster. By Nunya Bidnez on 2010 12 02

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