COVID-19: Foreseeing the unforeseeable Black Swan of 2020
COVID-19 is all over the world. From United States to Japan, more than 180 geographies have reported a confirmed case of coronavirus and almost everyone on this planet is adversely affected from its impact, directly or indirectly. Needless to say, an event of this scale would bring along many catastrophic consequences- social and economic. Many pundits have already declared COVID-19 as the “Black Swan” of 2020 with global economies starring at one of their worst recessions ever.
Let us understand the term ‘Black Swan’ to delve more on this. A ‘Black Swan’ is an unpredictable event that is beyond what is normally expected of a situation with potentially severe consequences. Black Swan events are characterized by their rarity and their severe impact. The term was popularized by former Wall Street trader Nassim Nicholas Taleb, who wrote about the concept in his 2001 book ‘Fooled by Randomness’. The phrase has an interesting origin. We all know that swans are white in color, and so the world believed until a black swan was spotted in Australia.
The underlining takeaways from this term are –
First- These events are extremely rare, cannot be predicted beforehand and come with severe consequences.
Second- Since they cannot be predicted, the only way to escape or reduce damage is to have robust systems in place.
Third- Once the event occurs, people tend to rationalize the event as having been predictable.
Coming back to COVID-19, financial markets across the world are bleeding hard, with Sensex losing approximately 30% of its value in Q1 of 2020. The Dow is also down more than 25% from its peak in February 2020. Benchmark indices losing more than 25%, credit flow interrupted, unemployment rising and people reducing consumption expenditure in such a short span, certainly validates the fact that we are not experiencing normal times. As per experts, not even during the Great Depression and World War II did the bulk of economic activity literally shut down, as it has in China, the United States, Europe and Asia today. Monetary policy makers have shot all the bullets in less than a month, as compared to what took them about 2-3 years to do after the 2008 global financial crisis.
While all these events lead us to draw a parallel between COVID-19 and past Black Swan events, the world is now learning about pandemics the hard way. Let us hope that the price paid is not too high – and that the right lessons are learned.