10 Black Swans

I’ve seen this posted elsewhere, but I think it’s worth highlighting here for those who might not have seen it yet.

For around a quarter century, Credit Suisse has dared to imagine what could happen to derail their consensus views on markets. In other words, they’ve dared to imagine that tail risks materialize.

The amusing thing about this (to me anyway) is that it is to a certain extent emblematic of markets’ overwhelming tendency to misprice the tails. These pieces almost read like a guide to the unthinkable – “here’s what happens if everything just goes to complete sh*t,” or “here’s what happens if everything goes precisely right at every turn.”

Of course the reality is that reliance on the bell curve leads us horribly astray when it comes to understanding both the impact and the likelihood of black swans coming to call. Given that, I’m not sure Credit Suisse’s title (“Surprises For 2017″) is accurate (would any of the 10 events listed below really be that “surprising” if we understand risk?).

In any event, below find the list which you’ll note also includes the bank’s baseline assumptions to remind you of just how “crazy” things would have to get for the surprises to materialize. Also note that tail events need not be negative – indeed, what’s “negative” to one investor will always be “positive” for another (even if cross-asset correlations went to “1” in a panic, someone was short).

Via Credit Suisse

1. The S&P hits 2,500 before falling back to 2,000. Core view: the S&P 500 rises to 2,350 mid-year before falling to 2,300.
2. EURUSD hits 0.90, before strengthening to end the year at 1.20. Core view: Credit Suisse’s house view sees the euro declining to 1.03 on a three-month view and down to 1.00 on a 12-month view.
3. Chinese GDP growth slows to 5% and with it the RmB weakens to 8. Core view: 6.8% GDP growth in 2017 and the RmB weakens to 7.33 at year-end.
4. A Le Pen victory in France’s presidential election. Core view: Francois Fillon becomes president.
5. European defensives outperform by 15%. Core view: we are a small underweight of defensives, though we did add to them in our Outlook.
6. President Trump’s policies disappoint the market. Core view: corporate taxes will be cut, inflation expectations rise and protectionist policies toned down.
7. The oil price hits $75pb by end 2017. Core view: The oil price will rise to $62 by the end of the year.
8. The Nikkei rises to 25,000. Core view: we have a mid-year target for the Nikkei of 20,500.
9. The European pharma sector underperforms by another 10%. Core view: we are overweight pharma and believe it can outperform modestly from Q2 this year.
10. US 10-year Treasury yields hit 4%. Core view: CS US rates strategists have a 3% year-end target.