Yesterday, I examined five gray swans that are already in view, but could fly in to roost in the year ahead. That's the first half of the list of 10 ugly goslings that the Japanese investment bank Nomura sees as potential surprises in 2018.
Black swans are completely unexpected, and therefore can't be predicted. Gray swans are a little different, neither hidden nor invisible, just largely ignored.
The investment bank has sought to identify situations that are a little out of the ordinary. We know that Donald Trump will be unpredictable -- what he does is a known unknown. These birds fall into the camp of the unknown unknowns.
Shock 6: Bitcoin starts moving other markets
Bitcoin must be the hottest topic in finance heading into the new year. It's a cliché to call it a bubble. Anyone with an interest in the business pages must have an opinion on its worth, even if that's zero.
The total market capitalization of bitcoin is now $280 billion. Throw in all the other cryptocurrencies (can we just call them made-up money?) and you hit a total market cap of $523 billion.
Half a trillion dollars is pretty decent for an asset class that was nonexistent just a few years back. The dot.com stocks at their peak were worth $2.9 trillion before they imploded, precipitating a recession. The total market cap of world markets is $79 trillion.
Where would bitcoin bite if it collapsed? Nomura notes that nearly 50% of all bitcoin trading occurs in Japan. That's double the 25% that the United States makes up. So Mr. and Mrs. Watanabe, Japan's fictional "man and woman on the street," might be most affected.
Bitcoin, while digital, is having a physical impact. The electricity consumed to run bitcoin costs $1.6 billion a year, or 0.15% of total electricity supply. The rise in energy required may rise as exponentially as the value of the currency. Bitcoin already eats up as much electricity as the nation of Denmark, reaching that point three years earlier than forecast.
Of the bitcoin mined, 71% comes from China, powered by cheap coal-fired fuel stations. Maybe the gray swan that bitcoin portends in 2018 is not an economic crash but even darker pollution clouds over Shanghai and Beijing.
Shock 7: Housing market decline = rate cuts?
Housing markets virtually the world over have been boosted by cheap central bank money. In certain parts of the world -- not least my hometown of Hong Kong, currently the most expensive place on the planet to buy a home -- prices have got to historical, and extraordinary, highs.
Canada, Australia, New Zealand and Sweden have all also seen heady house-price gains. Regulators have often responded with restrictions on quick sales, tighter terms on mortgages and other forms of artificially dampened demand.
The government always acts too late, and leaves its policies in place too long. Will that be the case if those property markets turn south? Prices are already falling in Norway and Sweden.
Falling house prices could cause a "negative wealth effect" that causes consumers to hold back on spending, worried their household wealth is being frittered away. That would ultimately cause central banks to slow drastically or halt altogether their plans to raise rates gradually.
Since such rate rises are already priced into markets, such a scenario would cause a "substantial market repricing," Nomura analysts Peter Dragicevich and Sam Bonney say.
Shock 8: A bigger proxy war in the Middle East
Conflict in the Middle East tends to start with a literal bang in the new year. Then it normally tapers off over the course of the next 12 months.
Will we see a repeat? There are two main areas where conflict could threaten the region.
Yemen is the largest humanitarian disaster in the Middle East right now. Houthi rebels have fired missiles at Riyadh, the Saudi Arabian capital, although they didn't really do any damage. Still, Saudi Arabia is likely to intensify its efforts to quell that rebellion. This brings the Saudis into conflict with Iran, who have been backing them.
The grayest swan would be some form of conflict between Saudi Arabia and Iran, themselves. Unlikely, but not entirely off the cards.
Lebanon and Palestine have also been in the mix. The sudden and unexplained resignation of Lebanese Prime Minister Saad al-Hariri has come and been rescinded. But Trump's decision to recognize Jerusalem as the capital of Israel increases tension in the region, with Hezbollah in Lebanon and Hamas in Palestine fervently against the move.
Israel, in one of the most-drastic scenarios, could decide to take the fight to Lebanese territory, clashing with forces either directly, or indirectly -- supported by Iran. Sunni Muslim nations may even lend tacit support to Israel.
Oil could move upwards around 30% to $80, if such conflict ensues. China, India, Indonesia, Thailand, South Africa and Turkey would all be hit hard, as major oil importers. On the other hand, oil producers Russia, Malaysia and Brazil should gain.
Shock 9: "Get to the chopper!"
Central banks in the year ahead should continue to wind back their massive stimulus.
Japan is a likely exception, with the Bank of Japan still set on pumping enough money into the system to jolt the country's economy toward its target of 2% inflation. BOJ Governor Haruhiko Kuroda is coming to the end of his term. While he is widely expected to be appointed to the post again, foreign-exchange investors, when polled, said there's a 5% chance that Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe and currently Japan's ambassador to Switzerland, could win the post.
Nomura reckons the chances of that happening are considerably higher: 10% to 15%. Or, even more likely, Honda could be appointed as a deputy governor. In either role, he is likely to push the central bank to take an even-more accommodative stance on fiscal policy.
Honda has argued that Japan should explicitly target building its economy to ¥600 trillion in size. He would likely push the BOJ to accelerate its purchases of Japanese government bonds to ¥100 trillion per year. This would set Japanese helicopters dumping money onto Tokyo into motion, and depress the value of the yen from its current level of ¥113 to US$1.
Shock 10: Credit -- stealth leverage pops?
As the U.S. Federal Reserve scales back the ample liquidity it has washed across all asset classes, areas of over-borrowing could surface.
Commercial real estate has again risen substantially in borrowing, and most of the debt is held by small banks. They may not be able to withstand a spate of defaults.
Subprime auto loans have also risen, to the point where in 2015 almost 40% of car loans went to subprime borrowers. The total existing debt load is around $400 billion. When oil prices fell, defaults increased in shale-producing states. A pronounced U.S. economic slowdown could present broader problems.
Student loans have risen to high levels, and wages have not been rising in comparative levels. This has led to fewer recent graduates buying homes.
Financial markets have seen corporate debt rise to roughly $3 trillion. A lot of the money went toward share buybacks at highly leveraged companies. The overall average credit quality has shifted down to BBB, with higher-duration loans. Repricing of credit risk could occur and cause "meaningful risk," Nomura says. Margin borrowing used to fund stock-market purchases would be at real risk, particularly if a rise in bad loans came at the same time as the stock market ground to a halt.
Plenty of swans to watch in 2018 ... let's hope they stay nice.