Black Swans and Savings Rates

Sometimes scientists are confounded. Take the black swans for example. When they were discovered in Western Australia it was considered an impossibility. One day there was no such thing as black swans and the next day there they were. Today the term ”black swans” refers to major unpredicted events. September 11, 2001 is an example. Although the events leading up to that day have been analyzed and accusations have been leveled, in the end it was a random series of global occurrences that led to the unanticipated world-changing event.

Black swans can be very big in the financial markets. How many brokers predicted the coming 50% drop in the S&P 500 in August 2008? Not many. Most brokers, analysts, and financial experts have forecasts within the same narrow range. But at least one fund manager, Universa Investments L.P., makes a living out of betting on black swan events. In fact, last year in the midst of financial chaos some of their funds posted over 100% gains. They had bet on the impossible - a huge market collapse. The most interesting part about this firm for a savings-oriented investor is that according to reporting in The Wall Street Journal their next big bet is on inflation and higher long-term interest rates. The big bet on inflation and interest rates is well outside the normal forecast of economists and analysts. Just to be clear, they are not talking about CD rates going from 2.6% to 3.4%. Their forecast is an abrupt and large jump in rates which could push CD rates to 6% or higher. A true black swan event. So the next time somone tells you that you are crazy to keep for keeping your money in a FDIC-insured savings account waiting for those higher rates, tell them that you are waiting for a black swan event. They may think you are even crazier, but you just might have the last laugh.