Frances 3rd largest bank sees steep downside risk to the market.
The folks at Société Générale, France’s third largest bank, are avid birdwatchers.
When they are not busy getting hawked by regulators for scandals, they are trying to spot the next black swan on the horizon that could have a profound negative or positive impact on the markets.
By definition, black swans are not seen by everyone. Nassim Taleb, the developer of the Black Swan Theory, uses the “turkey analogy” to describe this: although it is a surprise to the turkey that it is eaten for Thanksgiving dinner after days of positive data (being fed), it is not a surprise to the farmer nor the butcher.
In other words, don’t be the turkey.
That’s why every analyst, including SocGen, tries their best to predict which black swans are on the horizon. The most recent quarterly report sees eight potential black swans: six with potential downside, and two with potential upside:
Downside risks and their probability:
- 45% – Great Britain leaves the EU
- 40% – Greece defaults on debt and then (20%) Greece leaves the EU
- 30% – China hard lands (growth of <5%)
- 25% – US consumer saves more
- 10% – Fed behind the dots
Upside risks and their probability:
- 15% – Higher-than-expected price multipliers
- 10% – Fast track reform, particularly in Euro Area
The ratio of negative to positive black swans remains the same as their report from the previous quarter, but the probabilities have increased significantly: The chance of a Brexit has gone from 10% to 45%, while a Greek default goes from not existing on chart to a 40% probability.
