Black swans and the credit crisis

The Black Swan

From the book

A Black Swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random and more predictable than it actually was. Google was a black swan, so was 9/11.

Arguably, the current and still developing credit crisis is a black swan. Looking backwards, it seems so obvious it had to happen, but hardly anyone saw it coming. Now it’s metastasizing far beyond what most thought could happen, another black swan characteristic.

Consider Sentinel Management Group

The announcement that [Sentinel] has asked the Commodity Futures Trading Commission for permission to suspend redemption has potentially huge implications.

Sentinel operates in the niche business of holding the excess cash—over normal margin requirements—for futures market participants, including hedge funds, futures brokers, commodity trading advisors, and similar entities. The inability of Sentinel’s customers to access their cash balances could have, at best, interesting implications if those traders cannot meet margin calls.

Hello, cash balances in brokerage accounts are at risk now?

While Sentinel is barely a pimple on the wider money-market world, and in the overall scheme of things insignificant in the futures markets, it operates in a specialized niche where the consequences of its failure may spread out of all proportion to its size.

That’s what I mean by “metasticizing.”

PS The CFTC replied, saying they do not have the authority to grant Sentinel’s request.

  • Believe what you want, but the reality is that the San Diego real estate market peaked in summer ’05 and ever since, the value of homes has been in a decline. It’s even at the point where many San Diego neighborhoods have decreased in worth by double digits!
    If you don’t believe me, look at the facts. Check out these examples of median home value drops on resale homes from the local San Diego Union-Tribune newspaper (3-18-2007). And these figures are only since February 2006:
    Coronado 50%, La Jolla 15.6%, Pacific Beach 15.8%, North Park 15.8%, Ocean Beach 19.1%,San Carlos 19.1%.
    (You can view the full chart at:
    The average San Diego home price is around $550,000. That would mean that a 15% decline would cost a homeowner $82,500! If a home was bought last year, even with a 20% down payment, it could now be worth MUCH LESS than the cost of its mortgage!
    My predictions for the future of the San Diego housing market are as follows: I believe that the near future holds a seasonal sales pick-up but that in a few months, the downward trend will re-establish itself and not only continue, but likely worsen as the popular adjustable rate mortgages from the last few years come up for their first adjustment.
    San Diego housing values could easily be down 25 to 30% from their summer 2005 values by the end of 2007. Only a fool would believe the old industry slogan that “it’s always a good time to buy real estate”.
    For some great ‘insider’ articles on the San Diego real estate market, which I believe will apply to any of the hot real estate markets of the past five years… visit:

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