Black Swan Problem: Not All Markets Are Down!

``No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion," wrote philosopher David Hume in his Treatise on Human Nature, which is a rephrase of the black swan problem posed by John Stuart Mill [Nassim Nicolas Taleb: Fooled By Randomness p.117]

When we hear experts generalize that global markets are in bearish territory as means to give emphasis to their deflationary theme, we understand this as a Black Swan Dilemma.

While it is true that MOST markets are in the red or even in bear market territory (defined as in 20% decline), it isn't true that all markets are suffering losses or even in bear markets.

This great chart from Bespoke Invest...

Quoting Bespoke Invest, ``As shown, Iceland is down the most at -89.66%, followed by Ukraine (-76%), Bulgaria (-74%), Romania (-66%), Russia (-65%), and China (-65%). Brazil is down 40% year to date and India is down 48%. Clearly, 2008 can't end quick enough for the BRIC countries. Just 3 of the 84 countries are up for the year. Ecuador is up 5.8%, Tunisia is up 17%, and Ghana is up 61%. And with a decline of 36% year to date, the US is the 33rd best performing country out of the 84 analyzed."

To add, some countries as Bostwana, Venezuela, Costa Rica, Lebanon and Morocco are down year to date but LESS than 10%-which doesn't technically bring them into bear markets.

We understand Bespoke's chart as computed based on local currency figures.

courtesy of isx-iq.com

And we would like to add Iraq's booming stock exchange, which according to Washington Post (Oct 27, 2008), is up 50% over the year.

Of course no bourse can beat Zimbabwe's turbocharged performance, from All Africa.com (all highlights mine),

``The feat continued into 2008 with industrials posting a year-to-date growth of 960 quadrillion percent, which is 4,15 billion times as much as July's annual inflation of 231 million percent.

``The resource index is up 444 quadrillion percent since January. And so, from the look of things, ZSE investors may have indeed managed to hedge their assets against the effects of high inflation but some have been at a loss in US dollar terms."

As a reminder, Zimbabwe's market has been up on local currency terms but is significantly down in US dollar terms. The seemingly fantastic rise reflects the impact of hyperinflation to its asset prices, as Zimbabweans seek shelter in the stock market from a collapsing currency.

As a final note, the Bespoke chart also shows of the massive adjustments in PE ratio on a year to date basis.