How to Prepare for a Black Swan

A number of unexpected catastrophes and shortages dominated the headlines in the first quarter of 2011.

Japan was hit by a magnitude 9.0 earthquake and tsunami that caused a nuclear disaster, persistent power outages, and a host of other major societal and economic challenges.

China sharply tightened its limits on exports of rare earth minerals, on which the information technology, automotive, and energy industries rely.

The nations of the Middle East and North Africa experienced severe political eruptions, including civil war in Libya and regime-shaking protests in Algeria, Egypt, Iraq, Jordan, Syria, and Tunisia, which pushed oil prices above US$100 per barrel.

Portugal and Greece tottered on the edge of insolvency, destabilizing their political leaders. Christchurch, New Zealand, was hit by two major earthquakes in quick succession, and the state of Queensland in Australia suffered the worst floods in recorded history in at least six river systems, resulting in great social and economic disruption.

All these events are examples of the kinds of high-magnitude, low-frequency upheavals that Nassim Nicholas Taleb labeled black swans, after a historical reference to their improbability.

In The Black Swan: The Impact of the Highly Improbable (Random House, 2007), Taleb defined a black swan as “an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact.... Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Whether environmental, economic, political, societal, or technological in nature, individual black swan events are impossible to predict, but they regularly occur somewhere and affect someone.

Some observers argue that the frequency of these events is increasing; others say global communication networks have simply made us more aware of them than we were in the past.

In any case, with the rise of global business, it is likely that black swans carry increased risks for your company, including negative impacts on your customers, suppliers, partners, assets, operations, employees, and shareholders.

Today, not only can a catastrophe in one part of the world affect the sourcing, manufacture, shipping, and sale of products locally, but the interconnections of global financial, economic, and political networks ensure that the effects of such events ripple around the world.

Read the full article at S+G

Japan Tsunami: Nikkei Index plummets

Japanese stocks tumbled Monday and the central bank pumped a record amount of cash in a bid to soothe money markets shaken by Japan's biggest ever earthquake, a devastating tsunami and a nuclear emergency.

Major producers' stocks such as Sony and Toyota tumbled as power shortages prompted blackouts and factories remained closed, hurting production.

The Bank of Japan (BoJ) said it would pump a record 15 trillion yen ($184 billion) to help stabilise the short term-money market, making good on its pledge Sunday that it would unleash "massive" funds following the quake.

An additional 3 trillion yen will be deployed Wednesday. The BoJ will double a five trillion yen asset purchase scheme to buffer the economy from Japan's strongest ever quake, and left its key rate left at between zero and 0.1 percent.



But the move provided little relief for unnerved traders, with another explosion at Tokyo Electric Power's (TEPCO) Fukushima Number One nuclear plant helping push the index lower as economists eyed the impact on Japan's growth.

"Shares will be dragged down with Japan's March GDP figures expected to be sharply lower on a slump in economic activity, delays in distribution of goods on power cuts and loss of human lives," Shoji Hirakawa of UBS said.

Tokyo stocks plunged 6.18 percent Monday with the key Nikkei index tumbling below 10,000 to 9,620.49 as top Japanese firms suspended operations.

Automakers Toyota, Nissan and Honda have announced the suspension of production in Japan. At one point Toyota -- shutting production until at least Wednesday -- and Nissan slumped more than 10 percent.

TEPCO slumped 23.57 percent to 1,621 yen, following an explosion Monday in the building around the number three reactor at the troubled Fukushima plant.

Authorities have announced plans for scheduled rolling power cuts in areas served by TEPCO to make up for the loss of power from crippled nuclear plants.

Toshiba, which manufactures nuclear reactors, fell by its 16 percent daily limit to 411 yen. Sony, which has also shuttered plants, dived 9.12 percent to 2,550.

The yen briefly touched a four-month high before easing against the dollar on the massive liquidity injection. It surged to 80.60 against the greenback, the highest since November 9, and hovered around 82 after the fresh explosion at Fukushima as engineers battle to avoid a meltdown.

The government expects a "considerable" economic impact from the huge earthquake and devastating tsunami that plunged the nation into what Prime Minister Naoto Kan called its worst crisis since the Second World War.

The priority of the central bank is to ensure financial institutions in disaster-hit regions do not run out of funds. Over the weekend it provided them with 55 billion yen to ease the pressure before Monday's fresh fund move.

Monday's move was the BoJ's first since May, when European sovereign-debt fears pushed up the yen steeply and weighed on Tokyo shares, when it injected same-day funds to boost confidence.

Economists say it is still too early to assess the cost of the destruction from the record 8.9-magnitude quake and the 10-metre wall of water that laid waste to swathes of the northeastern coast and triggered an atomic emergency.

The official death toll is expected to rise substantially to more than 10,000.