Archive for the ‘Geopolitics & Politics’ Category

The Effects of PRISM on the Market

Saturday, August 3rd, 2013

The aftermath of the NSA whistleblowing scandal mushroomed into the kind of story we rarely see outside of a Jason Bourne movie. Given that the implications have spread to a global level, it wouldn’t be sensationalist to say that the controversy could become greater in scale than even Watergate; at the very least, it has put the question of data security and privacy more firmly into the public consciousness than ever before.

As the old adage goes, one man’s freedom fighter is another man’s terrorist. As such, we’ll withhold judgment on the ethics of Snowden’s actions but the case does have some very tangible effects on the contrarian investing climate.

Previously, we covered the increasing necessity for global political analysis when making investment decisions, and rarely has the arena of politics (and the public’s perception thereof) been shaken up so much, with one single act, than the recent controversies dogging the NSA.

Immediate Aftermath

In the week following Edward Snowden stepping forward as the whistleblower, shares of Booz Allen Hamilton Holding Corp. (Snowden’s employers) took a sharp drop of 61 cents down to $17.39.

While not a massive fall over the stock’s year trading range (which has a low of $11.85), a hold rating was put in place and social sentiment towards the consulting firm took a real hit. Shortly afterwards, share prices fell further to $16.85.

But what are the odds of a lasting impact on Booz Allen? Virtually nil, really; while serious, the Snowden problem was a freak anomaly and already dealt with (from the firm’s perspective at least). And although the public and investors are hesitant to touch Booz Allen, the industry is already treating it favourably. Late last week, it won a $25.8m tech support contract for the federal Highway Administration.

A predictable result, on the face of it. In an environment where trust is eroded in data security, it seems intuitive to be wary of companies offering these services (and provides good fodder for contrarian investors to put on their watch list).

Fear: A Contrarian’s Old Friend

On the other side of the coin, scandal of this sort generates fear. In times like these, people historically look towards more security, not less, and an increased interest in companies that handle data is likely to follow as the debate wages on. A case in point: despite Verizon being heavily implicated in the NSA controversy, the telecom firm saw a 3.5% rise in shares immediately following the breaking news, becoming the best performer on the DOW in early June.

Google, Facebook, AOL and a few of the other tech giants also performed similarly well despite also becoming the targets of privacy concerns. In fact, the only major tech company that traded lower around this time was Apple, which incidentally didn’t come under as much heat as the others.

Political Dissent and Distrust

Since details of the scandal are now blown wide open, we’re now seeing increased lobbying for transparency (both from the private tech giants, trade groups and civil liberty organizations). If the requests to disclose interactions with the US Government are acquiesced, we might even see an increased amount of trust in these corporations. Sadly, this is unlikely to do much to patch up the massively eroded trust in the Government itself.

And it’s being felt overseas, too, especially given that the spying isn’t endemic to the US – the EU has also fallen foul of Snowden’s whistleblowing, so political distrust is rife on both sides of the pond. Naturally this will result in a lower confidence in general public investing into any area in which the government has (or even just may have) a finger, but the political dissent could also have an effect on the macro level.

Huawei is a good example of how the NSA has changed the face of trading between the West and East; tension is escalating at an alarming rate between major governments, private industry and consumers, and like tectonic plates screeching against each other, something’s inevitably got to give.

We also can’t ignore the affects on currency investing. Distrust in the US government will have a knock-on effect with trust in the dollar, and the same is likely to occur in Europe. More curious still is the frankly shocking possibility that Bitcoin was created by the National Security Agency. If true, this would be a radical twist in the tale – all signs from Snowden-leaked documents point in that direction, although given that the story originally broke on (notorious for inane conspiracy theories), perhaps that should be taken with a pinch of salt.

Planning for the Month Ahead

Expect to see a lot of panic buying and selling over the course of the next month directly caused by the NSA scandal and the political reactions it provokes, and be sure not to ignore the European markets; data security concerns are as prevalent over there as they are in the US, and coupled with the precarious economic situation in which much of the population rely on payday loans in order to get by, the amount of fear and political distrust throughout the continent is at fever pitch.

As the Snowden narrative plays out, there will be some very interesting ripple effects within the cloud, mobile, telecoms and web service industries. Correctly interpreting these effects, and the outcome this kind of mass (and global) distrust will have on share prices is tricky and there’s often only a small window in which to act, but quite often the outcome goes entirely against the intuitive grain.

Political analysis required for investment decisions

Sunday, May 20th, 2012

We haven’t been writing for quite a long while and our dear readers may wonder why. One of the reasons is because today, economic and investment outcomes are increasingly being determined by politics instead of economics. Since we are no political analyst, we have very little to say. Back in 2006, when we first started this blog, we brought our readers through with great expositions on economic theory, particularly from the Austrian School of economic thought. Back then, economic analysis was the key to foresight. Today, the environment is different?there is a rising trend of government interventions, which results in more unintended consequences, which in turn led to more interventions. As Marc Faber said, having brilliant economic and financial analysis is not enough nowadays; we also need to enlist the help of political analysts in order to anticipate the next move by politicians.

As we all know, after months of calm in the financial markets, fear and panic are returning again, thanks to political upheavals in Europe. In this video, Stratfor made a very good point regarding the solution to this problem:

So, when ANZ’s CEO reckons that a euro-zone breakup is likely, he is in effect making a political judgment, which isn’t what bank executives are supposed to do in the first place. But we live in interesting times anyway, so this is hardly unreasonable. So, what will be the economic outcome for us in Australia should that happen? We don?t know but one thing we are sure: the euro-zone breakup is the most anticipated crisis. We have been talking about Greece since February 2010 (see European politicians hammered from both sides) and had repeatedly warned that the Greek crisis was far from over. So, we are not so concerned about this. That is not to say that we aren?t concerned at all, but we are saying this to remind our readers to keep things in perspective.

What we are more concerned are the unexpected and unanticipated mishaps. That could be war, geo-political tensions, which the financial markets are currently underestimating the likelihood. We have to include the economic (or rather, political) situation in China. It is well-known that China intends to transition its economy away from investment towards consumption. That will definitely result in Chinaslowing down and paring back their demand for Australia?s commodities. But as we said before, What Black Swan can hit China?, this too is also highly anticipated. But take note, the slowdown in the Chinese economy is a political event. The real estate crash that is happening inChina right now is an act of political will by the Chinese government. A lot of Chinese property developers are in financial trouble today because they failed to anticipate the determination of the Chinese government to burst the real estate bubble. Previously, the Chinese government was weak with regards to reining in the bubble and as a result, they lacked credibility when they announced the latest bubble-fighting policies. But unfortunately for the property developers, the Chinese government was serious this time and that was the Black Swan for them.

Regarding China, the million dollar questions that we would like to know are:

  1. Will the slowdown of the Chinese economy veer outside the designs of the Chinese government (i.e. crash)?
  2. When that happens, the Chinese government will definitely intervene. The question is, will they be successful in arresting the unanticipated crash?

In Australia, we already have our hands full dealing with the stress that is currently affiliating our economy (due to the effects of Peak Debt and the planned Chinese economic slowdown). A Chinese economic crash will be the trigger that breaks the straw.

Epistemic arrogance, running through traffic lights & Black Swans

Thursday, November 25th, 2010

Today, we received an email from one of our readers. After reading Failure to understand Black Swan leads to fallacious thinking, this is what he thought:

I liked your use of the term “Epistemic arrogance”. Recently I was driving and almost ran straight through a red light at a pedestrian crossing and I was trying to think how I could have been so reckless. I mean I am a great driver (?) and I had been down that road numerous times, yet I still almost managed to run down an almost-unfortunate couple. Sure the red light is in a seemingly random position, and the green light at the intersection 50m down the road can cause very slight confusion, but a red light is a red light.

Its then I theorised the issue. If it was my first time driving, or my first time driving down this road, there would be no way that I would have missed this red light. I would watch out for all hazards because I know that I don’t know. An arrogant driver on the other hand, as I was, thinking they know the lay of the land, can get into strife when the unexpected (in their mind) pops up.

Its this “epistemic arrogance” which leads the learned to cause crashes and accidents… I’m sure there are many top minds in the world who fail to look beyond their view… Learning from one’s mistakes is a great way to improve your management of risk!

This is a very great point. And by the way, it is Nassim Nicholas Taleb that came up with the term “”epistemic arrogance.”

We also have an example that is relevant to investing. Marc Faber once mentioned that the financial valuation of asset prices severely underestimate the possibility of geo-political Black Swans. The recent North Korean artillery pot-shots at their southern neighbour is a case in point. The US and South Koreans are planning to hold military exercises this coming Sunday in response to North Korea’s provocation. The North Korean had already warned repeatedly that they will be provoked with such actions, especially when they are happening so closely to the border. With a juvenile rookie dictator-in-waiting probably calling the shots in Pyongyang, we wonder at the wisdom of the American and South Koreans.

The Korean peninsular is just one example of geo-political Black Swans. We can also include Afghanistan, Lebanon, Iran, Pakistan as well.

More political instability for Australia ahead

Sunday, August 22nd, 2010

Now that the election is over, Australia has a first hung parliament in 70 years. What this means that no political party has an outright majority to form a government. However, what can happen is that either the Labor or Coalition party can form a minority government by dealing with the minor parties and independents.

Regardless which party forms the government, it can be easily toppled with a vote of no-confidence in parliament. When that happens, either the people have to go back to the polls again or the other party form the next government.

If the global macroeconomic headwinds of deflation comes and puts the Australian economy under enormous stress in the months to come, we can expect more political instability as blame shifting, polarisation of views and strife increases. This is an environment that is hardly conducive for sound economic policies and doing business.

Watch this space.

Tip for politicians: how to win voters’ hearts

Sunday, August 15th, 2010

There was this story about two men being chased by a bear. As both of them were running for their lives, one man told the other,

There’s no way we can outrun the bear. Why don’t we play dead instead?

The other man replied,

No, I don’t have to outrun the bear. All I need is to outrun YOU!

Alas! This is the current state of affairs for Australian politics. Political parties don’t have to come up with good policies. All they need is to be less bad than the next viable alternative. Next Saturday, as Australians go to the polls to vote for the next government, they will have to choose between bad alternatives. We find both major political parties have much to be desired. Both of them are almost indistinguishable from each other as they steer their policies to optimise their re-election prospects. As for the minor parties, some of their policies are based on good principles. However, they also have some other wacky (or extreme) ideologies mixed in as well.

So, the winner of this Saturday’s Federal election will go to the party that is least bad in the eyes of voters. Our guess is that the Labor Party will win the election. So far, the punts from betting agencies are agreeing with us.

The important question is, why would Labor be more likely to win?

The answer (as we will reveal later), reminds us of this simple phrase borrowed from Bill Clinton’s campaign:

It’s the economy, stupid.

Back in 1992, George H W Bush’s approval rating fell from 90% in March 1991 to 36% in the space of 15 months. He lost because he was perceived to have failed to address the economy adequately.

In Australia, we think the phrase should be:

It’s the jobs, stupid.

Back in 2007, the NSW Labor Party government won the election despite being one of the most incompetent governments in the world. We have no doubt that the electorate despised the NSW Labor Party. As this Wikipedia article wrote,

The newspaper editorials on the eve of the election held little cheer for either party. The Australian, The Sydney Morning Herald and The Daily Telegraph had each endorsed Labor at the 2003 election. Though each newspaper expressed misgivings about Debnam’s campaigning ability and called the result in Labor’s favour, they were unanimous in their attack on Iemma’s record.

If this election campaign has proved anything, it is this: Labor has completely lost its way on policy ? and the Liberals are no good at politics … However, after 12 years, Labor’s sustained policy failures should count for more than five weeks’ incompetent Liberal campaigning. If anything, the fact that spin-driven Labor has shown that it is vastly better at politics is of itself a reason to chuck them out.

So, how did they win the election? Our opinion is that the voters feared that the NSW Liberals would hand industrial relations powers to the Federal Government (under Liberal-National coalition at that time), which was pushing through the highly controversial WorkChoice legislation.

In late 2007, the Australian economy was still doing well and had an uninterrupted economic growth for more than a decade under the Liberal-National coalition. Since the status quo was good enough (or at least not bad enough), why did voters risk with the largely unknown Kevin Rudd and gave the Liberal-National coalition the sack in the 2007 Federal election? Again, the issue was because John Howard pushed his luck too far with the WorkChoice legislation.

Fast forward to early 2010. Why was Kevin Rudd’s mining super-profit tax very unpopular among the mining states of Queensland and Western Australia? Again, the idea was that the mining tax will kill mining investment projects and by implication, threaten jobs.

Today, with less than a week to the election, the Federal Labor had turned the tables against the perception that the Coalition is better at economic management and successfully painted the idea that Tony Abott (as Prime Minister) is a risk to the economy. With the economic crisis still unfolding in the US and Europe, voters could easily see what a bad economy can do to job security. To plunge the nail further into the coffin, some of Labor’s campaign commercials seek to fan suspicion of Tony Abott’s future intention with WorkChoice.

In Australia, it seemed to us that the way to the voters’ heart is through his/her job. If our theory is right, why do you think job security is so sacred for the average Australian voter?

Forum discussion: Immigration policy, fake GDP & suspiciously low unemployment rate

Saturday, October 24th, 2009

One of our readers had this to say at the forum,

The policy change of the new federal government to high immigration (the immigration revolution) for Australia is causing high demand for services and resources and is bidding up the price for real estate.

It is doing no favours for the current population.It is making life harder and planning for the future more difficult. Haven’t we been told that water resources are running low and farm land is becoming less productive, etc. Also its politically incorrect to challenge since the media/Labor equates criticism to immigration as racism well I think that it is just plain suppressive.

About that recession that we never had I think we should look at the stats again the measure of GDP is skewed. I am not a nation but if I was my income would have gone up a fraction according to the current measurement of GDP for that quarter however if I was to measure me as an individual ( which I am ) then my income went down. How can this happen? The government used a quirk in the figures to fool us. This is the core of it “The number of immigrants rose at a higher percentage rate than the growth in the economy” so it was a recession they just didn’t tell us. The high immigration policy has been going on since then so our growth is still being padded out by this quirk no wonder we do not feel the recovery as much as we think we should.

Also another quirk is that our unemployment rate is suspiciously low some of this this seems due to the education revolution reclassifying some youth from unemployed to students with no real change in status and the compression of wages by cutting hours worked we should measure something like FTE (full time equivalents) to get a real picture but this isnt being done. The number of hours worked in the whole economy has been dropping for month’s now and only in the last month did it rise and one month is not a trend.The whole unemployment measure needs an overhaul and perhaps the ABS needs financial independence like the reserve bank.

What are your views? Click here to discuss at the forum.

New urgency for action against Iran

Wednesday, October 7th, 2009

Two years ago, we mulled over the possibility of an Israeli strike on Iran. Back then, even though it was already strongly suspected that Iran had the intention to build nuclear weapons, a working bomb was still years away.

Just a few days ago, there were a couple of developments (that we learned from that will bring in a new urgency for action. Over the weekend, there were two leaks:

  1. The New York Times reported that an unreleased report from the International Atomic Energy Agency (IAEA) discovered that Iran is closer to building nuclear weapons than previously thought.
  2. The Sunday Times reported that the purpose of Israeli Prime Minister Benjamin Natanyahu’s secret visit to Moscow in early September was to provide the Russians with a list of Russian scientists and engineers working on Iran’s nuclear program.

These two leaks were significant developments:

  1. Many initially believed that Iran is still far away from a working nuclear weapon. This leak busted that wrong belief.
  2. It’s thanks to the Russians that development (1) happened.

Now, there’s a renewed urgency to the threat of Iran’s nuclear ambition, especially from the perspective of Israel, who is facing an existential threat from Iran.

Assuming that these leaks were true, coordinated and planned, it can be interpreted to send a message to the Russians and the Iranians. To understand why, consider why would the Israelis gave the Russians a list of their scientists and engineer currently in the Iranian nuclear program? Surely, the Russians do not need that list because they should know where their personnel are and what they were doing (given their highly competent intelligence service). By giving the Russians a list of names that they already knew, the Israelis essentially blew the cover of their intelligence operation. The only explanation of the Israelis’ action is that they already knew what they needed to know and the point of that list was intended to surprise the Russians of the extent of the Israeli intelligence. The message to the Iranians is that their deception of the extent of their nuclear program was penetrated and that they faced military actions soon.

With the Iranians getting the signal that they are facing war and the Russians put on notice that their relations with Europe and the US can potentially descend into a crisis, there are two possible outcome:

  1. Russians pull their scientists and engineers out of Iran and join in sanctions against Iran, which will force the Iranians to abandon their nuclear program.
  2. Russians will play dumb and continue goading the West, which will invite war.

Assuming that the leaks were intended by the US/Israel, then it means they are throwing the ball into the court of the Russians.

Should war break out, it is likely that oil and gold prices will surge while stock prices will tumble. Perhaps even US Treasury bond prices will rise too.

What’s the deal with China’s arrest of Stern Hu?

Tuesday, July 14th, 2009

Last week’s arrest of Stern Hu, Rio Tinto’s iron ore negotiator in China, on ‘espionage’ charges had caught many by surprise. Curiosly, the charges that were laid on him were, in the eyes of the Chinese government, matters of national security. In Western standards, such charges (e.g. bribery to obtain information on bargaining position), even if substantiated, are deemed commercial in nature.

What is going on? Why is the Chinese government doing that? Good questions. In fact, there are more questions than answers in this case.

Whatever turns out to be eventual outcome for Stern Hu, one thing is clear- the annual iron ore price negotiation is currently frozen indefinitely. The Chinese steel industry, before this incident, was a fragmented bunch of mob. Some of the steel makers wanted to break ranks and cave in to a smaller price cut. But with a few of the Chinese steel executive arrested too (this fact is overshadowed by the arrest of Stern Hu), it seemed that the Chinese government is imposing discipline on their own steel makers to force them into line. Only then can the Chinese steel industry present an united front against the pricing power of BHP-Rio. Currently, there are investigations being carried out at steel mills in China as the industry wondered whether more arrests are to follow.

Obviously, the impact on Rio Tinto is not good. As long as this incident is not resolved, it will imply revenue loss for Rio Tinto. The impact on China, however, is less clear. If this incident is a calculated move by the Chinese government, then it is likely that they are already prepared for an extended impasse. As we wrote before in Australia is a pawn in the international game of commodities,

Over the weekend, Michael Sainsbury wrote in The Australian that China has stockpiled a remarkable 100 million tonnes of iron ore. It?s one thing to stockpile copper, but iron ore is not easy to store in such huge quantities.

But is this move made by the Chinese government to gain merely a commercial advantage? If so, then it’s a very clumsy way of achieving a commercial goal. By using the national security apparatus on a common bribery case (who don’t bribe in China?), the Chinese government is politicising a commercial issue. This issue seems to be more than just a commercial matter. As this article reported, it was the Chinese president who endorsed a probe into Rio Tinto. Professor Yu Ping, an expert on Chinese criminal law said here,

My experience is the people working at the Shanghai State Security Bureau [who arrested Stern Hu] are well educated. Many speak English and are more competent and more aware of the national interest than their counterparts at the Public Security Bureau,” he said.

You have to assume that detaining Mr Hu is a calculated decision knowing full well the international political sensitivities of doing it during the iron ore negotiations.

The fact that the Chinese government did not bother to inform the Australian government of the nature of the charges (and Australia’s foreign ministry had to scour the official Chinese media to learn of that) shows that China is, for whatever reason, deeply offended with Australia.

Not only that, why would China want to elevate this issue from commercial matter to a national security issue?

As this news article reported,

The investigation into Rio appears to be part of a realignment of how China manages its economy in the wake of the global financial crisis, with spy and security agencies promoted to top strategy-making bodies.

The nine-member standing committee of China’s Communist Party, led by President Hu, had taken more control over economic decisions at the expense of the State Council, led by Premier Wen Jiabao, it said, quoting anonymous Chinese economic advisers. The president endorsed the Rio investigation, it said.

International security analyst Clive Williams said every country, not only Australia, now faced difficulties dealing with China, because of the country’s looming economic problems and leadership sensitivities about them.

Coming from a resource-rich lucky country, it is easy for people like us in Australia to see the world as one of plenty. In fact, relative to its small population, Australia has a glut of natural resources. China on the other hand, relative to its colossal population, sees the world as one of scarcity. Therefore, in our eyes, the Chinese government is over-reacting over a commercial dispute. As we wrote before in Nations will rise against nations,

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.

Certainly, there is more than meets the eye in Stern Hu’s arrest.

Will China fall under popular revolt?

Wednesday, May 20th, 2009

There is no doubt that the Global Financial Crisis (GFC) has hit China very hard. As reported in China’s Way Forward,

Idle factories, moored container ships, widespread bankruptcies, massive migration back to the hinterlands, strangely clean air?the signs of depression are everywhere in China. Because it makes so many of the goods the world isn?t buying now, China stands to be worse hit than the rest of the world ?just as America was during the Depression, when it was the world?s sweatshop.

There is a school of thought that believes that if the Chinese government is not able to maintain economic growth, then the government will lose legitimacy in the eyes of the people and there will be political upheaval as a result. The extreme views in this school of thought even envisage the break-up of China by comparing it with the Soviet Union. As that article says,

Its unspoken premise is that average Chinese people just barely tolerate the social bargain the government now offers?limited freedom, potentially unlimited wealth. So if the regime ever falls short on its material promises, the deal will be off and people will rebel.

But as this article noted, this school of thought do not understand the cultural and political reality of modern China. In the 20th century, China suffered civil wars, foreign invasions, tyranny, human-induced starvation (Mao’s Great Leap Forward). It was only more than 30 years ago that the brutal Cultural Revolution ended. To put it simply, the tremendous sufferings of the Chinese people are still recent memories. As one Chinese businessman said during a documentary TV interview, the prosperity of today’s China seems like a dream to him as it was only recently that he was living in relative poverty.

No doubt, the wealth gap in China has much to be reduced and there are many endemic issues yet to be solved (e.g. inequality, corruption, uneven economic growth, environment, pollution, lack of political freedom, etc). But relative to what the Chinese people had to endure during their recent past, their lives have improved tremendously. As that article said,

People doing routine jobs have been through great hardships and dramatic swings of fate. Last year I interviewed a party official in Shanxi province who was laying out his regional-development plans. Every 10 or 15 minutes, he would stop and say (through an interpreter), ?Do you understand? If it had not been for Deng Xiaoping, I would be behind an ox in a field right now. I would not be sitting here wearing a necktie and talking to a foreigner.? Or, ?Do you understand how different this is? My mother has bound feet!? A scholar I know in Beijing once offhandedly remarked that he had developed self-confidence when learning that he could survive for four years as a teenager on a labor gang during the Cultural Revolution. People in their teens and 20s were not on the labor gangs?kids today!?but they have heard the stories.

From this perspective, the ‘economic depression’ caused by the GFC is hardly worth a mention compared to the sufferings even 30 years ago. Despite the discontent and protests of many Chinese, the object of their fury is usually not against the ‘system.’ As that article said,

But when people complain, it is usually about those crooked bosses, reporters, mayors, or bureaucrats?not about the system or its rulers. Principled protests against the system and its repression certainly do exist, as with the daring ?Charter 08? petition for civil liberties signed by more than 300 intellectuals late last year. But that is not the norm.

Perhaps these workers are missing the big picture, but for now they generally act as if they expect the national system to protect them against lapses at the local level.

Thus, if the Chinese economy still has much room to deteriorate, we doubt there will be any mass revolts that will fracture China.

Two major Black Swans looming ahead for the global economy

Sunday, May 3rd, 2009

When you look at today’s global market rally, it seems that the bottom of the global financial crisis has already reached. In reality, the global economy had not improved by many measures. It had merely become less bad, compared to the precipitous decline in the second half of 2008. Financial markets tend to anticipate the future by recovering before the actual recovery of the real economy. That curious phenomenon should not be interpreted as foresight. Instead, the market has the habit of jumping the gun- the presence of bear market rallies is a testament of that fact.

This bottoming makes the market more vulnerable to Black Swans. Currently, we see two Black Swans that the financial market has not yet factored in. This is probably the time to put in their contingency plans for adverse reactions from the market (e.g. hedging, stop-losses, etc), especially for traders.

The first one is very well-known- the probability of a swine flu pandemic. In the 1918 Spanish Flu pandemic, killed anywhere from 20 to 100 million people. Half the world’s population was sick. Nobody knows how this swine flu will turn out. Should the virus reach Asia, the crowded and unsanitary conditions make it an ideal ground for further mutation and proliferation. Medical experts pointed out that the world is overdue for a pandemic. Since we have more faith in medical experts than in financial market pundits, our belief that this time round, the death toll may not be as bad as the Spanish Flu pandemic. Whatever the death toll of this potential pandemic, we believe the bulk of the economic damage will be caused by disruptions on daily life and the human fear factor.

The second Black Swan has received less prominence from the media- the situation in Pakistan. Last month, the Taliban had captured the Buner district in Pakistan (not Afghanistan!), which is merely a few hours drive from Islamabad, the national capital. Other reports revealed that the Taliban had advanced to within 96 km of Islamabad. This event is part of the bigger picture of the Taliban’s consolidation of control of north-western Pakistan. With the Pakistani army larger than the US army, the audacity of the Taliban shows how internally weak the Pakistani government is. The situation is so bad that the US Army’s General David Petraeus commented that “there may be just two weeks left to prevent the Taliban from overthrowing Pakistan’s Government” (see “Two weeks to save Pakistan”).

This is a very worrying situation because Pakistan is a nuclear-armed nation. The control of Pakistan’s nuclear weapons by the Taliban is a very dire scenario. Not only that, such an event can potentially fracture the huge Pakistani army (the Pakistani population is fractured too). India will be very worried because they have their own insurgency to fight in the Kashmir region and are always at odds with Pakistan since independence- the Taliban will be a much less rational and predictable enemy. China shares a very long border with Pakistan and will be very worried too. The US and its NATO allies, already having difficulty containing the Taliban in Afghanistan, may lose Afghanistan to them. The Taliban, who shares the same Wahabi school of the Sunni Islamic  fundamentalism, is at loggerheads with the designs of the Iranians for influence in the region. Iran almost fought a border war with the Afghan Taliban a few years ago. Worse still, the Taliban is allied with Al-Qaeda, which will surely turn Pakistan into a haven for terrorists.

Gold will thrive in these two Black Swan conditions. But it is something no one will welcome.