When I interview economists and investors, I always ask the same question: What have you learned over the last five years?
After posing that question to value investor Mohnish Pabrai recently, he responded:
What I learned is that you have to appreciate the role of probabilities and outliers in outcomes. I think that there are events that will take place from time to time in our lifetimes which will defy what we might think is likely to unfold. So the way the real world unfolds is vastly more messy than the way we might think it unfolds. I think that's just part of the territory.
This falls in line with Nassim Taleb's book The Black Swan: Events that we think are nearly impossible actually happen all the time, and those events have an outsized impact on markets, economies, and people's lives.
In that spirit, here are seven events that I don't think are terribly likely but that, should they occur, would take people utterly by surprise.
1. At least one of the world's top 20 largest corporations collapses virtually overnight in the next decade (40% probability)
People look at large, established, global blue-chip companies as a bastion of safety. But in the last decade alone we've witnessed the meltdowns of:
- Lehman Brothers
- Fannie Mae and Freddie Mac
All of them went from beloved, owned-by-your-grandmother blue chips to sawdust in a matter of days.
Who will be the next to drop? I have no idea, and it would be irresponsible to guess. But it has happened before, and it's only a matter of time before it happens again.
2. The government runs a surplus in at least one year over the next decade (15% probability)
Two years ago, California was the poster child of runaway deficits, with a $24 billion deficit in 2009 and no end in sight -- "Our Very Own Greece," wrote The American Spectator just last year.
But something incredible happened. The economy rebounded more strongly than most had anticipated, and the state legislature made some difficult choices on taxes and spending. Recently, Reuters wrote, "California Governor's budget has surprise: a surplus." This is a tentative budget, but it shows how fast things change.
The odds are small (I'll put them at 15%) that the federal government will run at least one surplus over the next 10 years, but you can't rule it out. The last federal surpluses, in the early 2000s, came less than a decade after the deficit and debt panics of the 1990s.
This isn't a forecast, but I could see it playing out like this: An energy boom and housing rebound push economic growth far above expectations, a booming stock market generates a wave of capital-gains tax revenue, and growth in health care costs drops far below expectations.
How crazy is this? About as crazy as predicting in 1992 that we'd run a surplus in 2000, or predicting in 2000 that we'd run a $1.4 trillion deficit in 2009.
3. Interest rates stay this low for an entire decade (20% probability)
Japan's interest rates fell to near-record lows in the early 1990s. Traders immediately began making bets on when they would rise, using the logic that they couldn't possibly stay that low forever.
But five years later, they were lower. And five years after that, they were lower still. And another five years later -- well, you can guess.
Here we are, 20 years after Japan's interest rates first plunged, and rates are as low as they've ever been. Betting that Japan's interest rates will rise has been called "the biggest money-losing trade of all time."
I hear assumptions today that America's super-low interest rates are sure to rise over the coming decade -- and probably by a lot. I think that's right. But it's not certain. When you're in a debt-deleveraging, interest rates can stay low for far longer than anyone thinks likely.
4. China's growth completely falls off the tracks (20% probability)
"The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly," Warren Buffett said a few years ago.
I think he's right. But it's not hard to imagine the story playing out differently.
For one, China has a big demographic problem. Its working-age population declined in 2012, and it will fall further thanks to its one-child policy. Ignoring big demographic imbalances is what caused most people who thought Japan would become the world's superpower to miss the mark.
It's also a highly managed economy with a government that can be, shall we say, unpopular at times. What would a political revolution do to China's economy? I don't know. It might be a huge boost. Or it might derail its prospects entirely. Either way, no one should assume that any country holds the keys to the future. Things change quickly.
5. European stocks post some of the highest stock returns of the next decade (30% probability)
Europe is the weakest economic region in the developed world. It's buried in debt, it has an inane currency structure, it's uncompetitive, it has an aging population, and, worst of all, its people and businesses are losing confidence that things might ever get better.
But European stocks could post some of the highest returns over the next decade. Why? Because they're cheap.
There's little correlation between a country's economic numbers and the performance of its stock market, especially over a period of less than a decade. What really makes a difference is valuations -- and European stocks are some of the cheapest in the world.
Even if Europe's economy continues to stagnate, it's not hard to imagine European stocks posting strong returns. Consider: The Greek stock market was one of the world's strongest in 2012, crushing China and America. It all comes down to expectations, and expectations for European stocks are pretty low.
6. We face a nationwide housing shortage (45% probability)
People have been pounded with so much information on the housing bubble that it seems obnoxious to be talking about a housing shortage. But I could see it happening. New-home construction is far below the rate of household formation. And since so many construction workers left the housing industry, some homebuilders are actually having a hard time finding enough qualified labor to expand. If this keeps up for another few years, we could have a nationwide housing shortage.
Odds are that homebuilders will ramp up capacity and more homes will come on the market as higher prices free homeowners from underwater mortgages. But most bubbles don't burst and then go back to a healthy normal; they overshoot on the way down.
7. Something totally unforeseen that no one today is capable of imagining happens (99% probability)
Take any 10-year period in American history. Now think about the biggest economic story of that decade. Maybe it was World War II, the ensuing manufacturing boom, the 1970s oil crisis, the computer, the Internet, or the Wall Street crash.
How many of those events were predicted by anyone, let alone the masses, a decade before they happened?
It will be the same going forward. The biggest financial story of the next decade will almost certainly be something that no one is talking about today. That freaks people out, because we love predictability and want to pretend we can see the future. But we can't, and we never will. "That's just part of the territory," as Pabrai might say.