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Black Swan on horizon?

Black Swan Definition from Investopedia:

A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.

From Markets point of view, there are two events in 2020 which could match the above definition:

Coronavirus becoming Pandemic:
Based on weekend news, the virus has already spread in South Korea, Italy and to some extent Japan. While China is putting extra-ordinary measures to stabilize the situation, other countries are just gearing up to potentially deal with unfolding situation. This means lock down of cities, travel restrictions, cancellations of trade shows and major gatherings to control the potential of spread. Companies have been prudent in cancelling major shows like MWC (Mobile World Congress) and many others. Markets was expecting this to stabilize within few weeks and getting signs that China's measures are working and net new cases have come down significantly. However markets have not taken into account spread beyond China. Economic impact was also supposed to be contained with China. Now most likely world economy in Q1 would be barely positive and potentially slide into negative territory if the spread continues into Q2. Friday yields on 30 year treasury reached all time lows. Bond markets are flashing red signaling trouble ahead. Central banks (US FED being most important) need to gear up for rate cuts and get ahead of the curve before deflation takes hold. Won't be surprised if US Fed declares surprise rate cut in 2020.

Sanders winning Presidency:
Given the primary/caucus voting in first three states, Sanders have momentum and have more than 50% chance of winning democratic nomination unless all other candidates rally behind centrist alternative like Bloomberg. In next 10 days (till Super Tuesday), democratic nomination race would be reduced to 2-3 candidates with clear choice between socialist Sanders vs centrist/capitalist Bloomberg. Young generation (including my kids) are going for Sanders while older voters (like me) would prefer someone like Bloomberg. It would almost feel like: do you want to change the complete system (revolution) vs incrementally improve (evolution). If Sanders wins nomination, it would be a battle between left vs right. Markets have not incorporated the possibility of Sanders presidency (same way it did not consider Trump Presidency in 2016). 

Given the real possibilities of these two events, watch out if you are considering any new investments. 

/Shyam



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