Waiting for The Black Swan

The comments below are an edited and abridged synopsis of an article by Chris Martenson

The world is sitting on an enormous pile of debt and IOUs that could go up in smoke. While the central banks can print money, create the easiest financial conditions in decades, and constantly intervene in both word and deed in every financial market, they cannot print more oil.

Waiting for The Black Swan | BullionBuzz
Several white swans and a single black swan balanced on a stack of British one pound coins. The stack of coins with the black swan is falling over. Black swan theory or a black swan event is a term used to describe a very rare or otherwise unexpected event that has a major effect. The term is based on an ancient saying which presumed black swans did not exist. It is a metaphor often used in economics to describe surprise events with, usually, severe and negative financial and economic consequences.

If the Strait of Hormuz is shut down for any length of time, that’s going to be a black swan event. It will be unforeseen, have a large impact, and afterwards people will try to explain the resulting complexities in simplistic ways.

You need to have a plan in place for what you will do if or when that happens.

Already there are signs that oil traffic through the Strait of Hormuz has slowed, perhaps to allow the insurance risks to be sorted out. It’s could take time to assess the actual risks and apply new policies and rates. In the meantime, some ships will sit anchored out, or at port.

An oil price and supply shock is exactly the sort of black swan event that will take nearly everyone by surprise. The shale-fueled abundance has carried on for so long that nobody thinks about the flip-side of that story.

Long after the damage has been done and the dust has settled, historians may say it was that one c-308 variant missile from the shores of Iran striking and sinking the Saudi-flagged VLCC (the “Layla”) in the center of the outbound shipping channel of the strait of Hormuz that caused everything that followed.

While that may have happened, the explanation won’t be accurate. Without an entire bonfire of ultra-dry debt tinder lying around, and without decades of ill-will and nefarious actions, the missile wouldn’t have flown in the first place.

Nothing happens in a vacuum. There’s always context, and when it comes to Iran, there’s plenty: Many decades of interference and blunt diplomacy.

Keep an eye on the Strait of Hormuz and have a plan in place before things go off the rails. There’s already an economic slowdown that will morph into a recession if/when an oil shock occurs. This credit bubble has already lasted too long. Every bubble is in search of a pin, or a black swan. An oil shock would be an entire flock of black swans against which the central banks would be powerless.

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