The black swan concept was popularized by finance
professor Nassim Nicholas Taleb's book "The Black Swan: The Impact of the
Highly Improbable." The book, noting that it was widely assumed all swans
were white until the discovery of black swans, highlighted that outlier, or
previously unthought-of, scenarios can some to pass with extreme economic
impacts.
"These are the unlikely but impactful events
that, in our opinion, lie outside the usual base case and risk scenarios of the
analyst community," it said in a note Wednesday, noting it was avoiding
the more usual, well-discussed outliers such as a euro-area breakup, a Donald Trump impeachment or a China implosion.
Potential shock 1: U.S. productivity might boom
Nomura noted that global productivity has been anaemic
since the 2008 global financial crisis and its base case is for U.S.
productivity to remain on the low side for years ahead.
But it noted that in the early 1990s, productivity was
expected to remain low, but it quickly doubled during that decade's tech boom.
"We know that low investment has been a key
contributor to poor productivity. It certainly has been true that investment in
buildings and equipment is at recessionary levels," Nomura said. "But
investment in intellectual property and R&D is running at close to
post-crisis highs. The fact that this form of investment is less tangible makes
it easy to miss. It could also provide the foundation for a surge in
productivity."
The market implications would be
"far-reaching," with likely stronger stock markets and more
aggressive tightening from the U.S. Federal Reserve, Nomura said.
Potential shock 2: China might float its currency
Nomura said the chances of China letting its currency
become completely market-determined anytime soon were "very low." But
it added, if China were to suddenly remove its 2 percent onshore trading band
and stop intervening in the currency market, the yuan would depreciate sharply rapidly.
"The risk is that rapid renminbi (yuan)
depreciation would lead to a sell-off in local markets and feed through to greater negative regional and
global market contagion," Nomura said.
Potential shock 3: The European Union (EU) could reform, leading the
U.K. to re-join
"To suggest Brexit could reverse and become
Bremain requires a series of improbable events that most would vehemently
disagree with, including us," Nomura said, but it added: "With
politics, one cannot rule anything out."
Nomura pointed to two potential, if unlikely,
scenarios.
In one, the U.K. could unwind the Brexit decision
through a general election, amid court cases over whether the U.K. needs
Scottish and Welsh parliaments' consent to exit the European Union. If Brexit
runs into roadblocks, the conservatives may call an election in hopes of
solidifying a mandate, Nomura said, noting that this could lead to opposition
parties winning or a smaller conservative majority.
The second Brexit-reversal scenario would be EU-led,
with the bloc offering the reforms that the U.K. has been seeking, such as
redefining free movement of labor, Nomura said.
Potential shock 4: Japan inflation might surge
Nomura said the most plausible channel for a Japan
inflation jump would be interplay between the dollar/yen pair and oil prices. Up until recently, the yen would
weaken as oil prices were falling, Nomura noted. But if that correlation were
to weaken or flip so that higher oil prices and a weaker yen coincided, Japan's
inflation could pick up sharply, it said.
If Japan's inflation were to rise far enough or were
to keep rising in an unstable fashion, the central bank would need to consider
exit strategies from its easing programs, Nomura said.
Potential shock 5: The U.S. Federal Reserve could be muzzled
Nomura noted that some have viewed President-elect
Donald Trump's loud disapproval of the Fed as a potential attack on the central
bank's independence and potentially opening it up to political meddling.
There was an outside possibility of radical changes,
potentially including altering the Fed's mandate, such as changing the
inflation-targeting basis, Nomura said.
More radically, Nomura noted that Trump has
"expressed sympathy" for returning to a gold standard.
That would lead to higher policy rates than expected,
Nomura said.
Potential shock 6: Russia may flex its muscles
Nomura noted that investors have increasingly asked
about whether Russia might become militarily aggressive in Eastern Europe.
While Nomura said it wasn't its baseline expectation,
the risk could emerge amid the potential for changes in U.S. foreign policy,
potential sanctions renewal and upcoming major European elections.
Nomura said the two most plausible scenarios for
potential Russian aggression would be greater involvement in Ukraine, toward
the border with Poland, and involvement in the Baltics, particularly Lithuania.
Potential shock 7: A clearing house may fail
"There's been an assumption since 2008 that
clearing financial contracts through a central counterparty (CCP) rather than bilaterally
between banks (OTC) will reduce systemic risk," Nomura noted. "The
idea is that, if all banks face one institution, the CCP, then the failure of
one bank could be contained as other banks would face the CCP not the failing
bank."
But it noted that the downside to that arrangement was
that the CCP itself can become a systemic risk.
"Were it to fail, the fall-out could be worse
than the failure of one or two large banks alone," Nomura noted.
Potential shock 8: Japan Prime Minister Shinzo Abe loses power
Abe's ruling coalition holds a super-majority in the
lower house and opposition parties remain unpopular, Nomura noted, saying it
boded well for political stability heading into general elections in 2017.
But Nomura noted a potential twist as the four main
opposition parties considered nominating joint candidates for each electoral
district, which reportedly could cost the ruling party as many as 60 seats,
based on 2014 vote totals.
The most extreme outcome would be for Abe be weakened
substantially and potentially resign immediately, Nomura said.
"Were this 'grey swan' to emerge, Abenomics
trades would be unwound. Japanese equities would likely bear the brunt,"
it said. "In addition, if Japan had an administration involving
anti-establishment parties (such as the communist party), investors would
likely become concerned about the anti-establishment movement reaching Japan.
This would further increase political uncertainty and volatility
globally."
Potential shock 9: Emerging market capital controls may return
If "Trumpflation" causes higher U.S. yields
and a stronger dollar, emerging markets could face even more pronounced
outflows, Nomura noted.
"Countries with very high levels of foreign portfolio
investment ownership, particularly volatile currencies, low rates and low
foreign-exchange reserves would be at most risk from capital controls,"
Nomura said. "They would also be the ones that markets would look to for
more disorderly devaluations either before capital controls were tried or after
if they failed."
Potential shock 10: Paper money may disappear
"We are on the threshold when secure
decentralised electronic money and payments systems could replace notes and
coins in circulation," Nomura said, noting that Sweden has already been
discussing the prospect.
Nomura said policy makers in developed markets with
negative monetary policy rates, such as Europe and Japan, may push in that
direction.
In those regions, "people can simply withdraw
their money and put it under their mattress to avoid incurring negative
rates," it said. But with "e-holdings," negative-rate policies
can be transmitted to "e-wallets," encouraging increased consumption,
Nomura said.
That could elicit a sharp negative reaction from the
public, Nomura noted.
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