A Black Swan Event?

By Pierre Villere

For months now, I have been extolling the virtues of the U.S. economy, as well as the larger global markets, and touting the slow-but-steady strength of U.S. business and industry, especially the strong construction markets that drive volume in our concrete businesses. And as I have written so many times before, my philosophy is that “sentiment is self-fulfilling.” So now we have the coronavirus, and some of the most recent reactions to it have left me disquieted, wondering if a “Black Swan Event” could upend the U.S. economy.

When the 2008 global economic crisis unfolded late that year, there were many pundits who declared it a Black Swan Event; the term arises from the work of Nassim Taleb, who famously published a book on the subject in 2007, the year before the Great Recession gripped the world’s economies. The name was derived from a common expression in 16th century London as a statement of impossibility, and reflected the Old-World presumption that all swans must be white because all historical records of swans reported that they had white feathers. In that context, a black swan was impossible, or at least nonexistent. But in 1697, Dutch explorers became the first Europeans to see black swans in Western Australia, and the term subsequently metamorphosed to suggest the idea that a perceived impossibility might later be disproven.

Taleb’s Black Swan Theory refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences. Further, he regards almost all major scientific discoveries, historical events, and artistic accomplishments as black swans, as he considers them unpredicted. He gives the rise of the Internet, the personal computer, World War I, the dissolution of the Soviet Union, and the September 11, 2001 attacks as examples of Black Swan Events.

The most recent example of the potential of what the coronavirus could do to our economy is illustrated in the events taking place around Milan, Italy, and how a relatively small outbreak in the surrounding region has brought the local economy to a halt. Tourist landmarks like the Duomo Cathedral and the La Scala opera house are closed, as is the city’s universities and schools. Bars are shuttered, and the usually buzzing streets, trams, restaurants and shops are all empty. Further, news footage reveals haute couture fashions shows where all the seats are empty, with no one present except the models themselves; they scurry out after the shows donned with surgical masks, anxious to leave as soon as possible.

Milan is an example of the growing anxiety about the virus’s spread and its broader impact on the city’s life and economy, and of the drag a hobbled Lombardy region could have on the rest of Italy’s economy. Eleven smaller Lombard towns to Milan’s south have been locked down as the number of cases in Italy continued to multiply. Milan is the country’s economic engine, cultural capital and most dynamic city, and represents 10 percent of the Italian economy; the surrounding Lombardy region represents more than double that. The Italian stock markets have plunged over fears of what may be in store if the virus spreads.

This is an example of how sentiment, in this case fear, can be self-fulfilling. I worry about the spread of the coronavirus to a major American city, a reaction like the one in Milan, and how it could impact our industry. Despite my underlying belief in the strength of our construction economy, there is nothing we can do if a Black Swan Event grips our psyche, and swiftly and suddenly slows us down. Let’s hope for the best … and hope that the spread of this virus can be contained before it damages our own economy.

PGV headshot 2016Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.[email protected]