THIS.

My brother-in-law owns a company and they put in place a ton of redundancies after the 08' crash. They're in a specialized manufacturing. After 6-7 years of stability and some of their markets recovering and stabilizing, he started getting pressure from his two partners to cut the safety nets and re-invest it in supply chain improvements. He was against it saying the same thing, "This isn't a five or six year plan, it's a permanent plan to protect the company." In short, he was outvoted. The redundancies were removed and the money was re-invested in other areas. .

The last week basically saw their entire supply chain shut down, almost all of their customers shut down and yesterday they had to send everybody home and shut down themselves for the time being.

My brother in law texted me saying, "This is the worst fucking "I told you so" in my life, I'm not sure we can survive this." He's meeting with his partners this week to assess the damage and how long they can survive before they'll need an influx of capital to keep the lights on.

Had they kept all of their money tied up in their emergency plan, they would've been able to pivot to other suppliers and continue to serve their clients. Right now? They put all their eggs into one basket and it could very well kill the company.

A few examples:

1. the US has built up it’s oil producing capability. If the Saudi’s keep prices low, then everything will be mothballed. So the ecosystem of businesses and skilled staff supporting the US oil industry will massively degrade quite quickly. It can’t be ramped up quickly later.

2. Huawei. Massive shock of US sanctions. Can only be saved by amazing levels of support by Chinese govt.

3. Rare earth production. China took over the market, then shut down all exports. What producers were left and why did they still exist?

It's easy to look at Steve Jobs and Jeff Bezos and think that a sufficiently charismatic CEO can use his or her "reality distortion field" to hypnotize investors, but it doesn't work like that over the long run. The reason investors had such patience with Jobs and Bezos is because they were demonstrably increasing their companies' market share and profitability, respectively. Under Bezos, Amazon went from a niche seller of books to the largest e-commerce site and one of the largest retailers, online or off. Under Jobs, Apple went from a has-been computer company kept alive as a prop for Microsoft to wave at the DoJ to a leader in personal computing, consumer electronics and the most profitable corporation in history.

Do you think that shareholders would have kept Bezos and Jobs around if their strategies had not been delivering the tangible results, quarter after quarter, year after year? I think not. For proof, we can only look to Yahoo, which spent an enormous amount of time and money wooing Marissa Meyer from Google, only to ignominiously fire her 5 years later after she was unable to arrest Yahoo's declining profitability and relevance.

A CEO of a publicly traded corporation, especially a publicly traded corporation that is financial trouble, only has so long to demonstrate success, where "so long" is measured in months or, at most years, not decades. If the CEO cannot demonstrate tangible results within that time frame, he or she will be fired, no matter how powerful their "reality distortion field". CEOs cannot transcend the crowd-sourced incentive-based decision making of the market over the long term. What the can do is spin a good story that persuades the shareholders to leave them alone for a brief period of time as they attempt to make the necessary changes in order to improve or restore profitability. If they are unable to do so, they are summarily dismissed, and replaced with someone else who can tell a better story about how they're going to improve the profitability and efficiency of the firm.

No amount of Jeff Bezos or Steve Jobs charisma is going to be sufficient to persuade shareholders to accept a 10% penalty year after year in order to safeguard a little known, little understood part of the supply chain against an event that may or may not happen decades from now.

I agree with your conclusion, but I want to push back on the assertion that COVID19 was a "black swan". Pandemics (especially pandemics such as this one) are not black swans. Numerous experts saw predicted them. There were examples of similar events in the recent past (for example, SARS, MERS, H5N1 influenza, etc).

The reason markets are bad at dealing with pandemic preparation is the same reason that markets are bad at dealing with pollution. It's a collective action problem. The benefit of pandemic preparation is spread across society in a diffuse manner, whereas the costs are borne by the individual manufacturers and distributors who take on the increased transaction costs of dealing with three or four suppliers, when their competitors get away with only having one or two.

It's analogous to dumping untreated sewage in a river. Even if the executives at a want to install scrubbers, as long as it has a competitor who can manufacture goods or provide services more cheaply by dumping untreated sewage, the company cannot do so, because the costs incurred will put it at a competitive disadvantage, and it will lose business to its competitor. In the same way, even if executives understand that having a supply chain dependent on a few key suppliers is a potential liability, they can't diversify as long as those suppliers are the lowest cost option, and moving away would result in them providing the same goods and services at a higher cost than their competition.

Black swans aren't necessarily unpredicted. In fact they are usually predicted by a few people, but the predictions run so counter to the interests of established set of systems and models, that they are ignored.

In the book, Taleb actually spins a story about an individual who spends his entire life predicting and preparing for an invasion by barbarians, but is ignored, and upon his deathbed, the invasion happens.

People are constantly making predictions, many of which are very implausible, but it's never clear when one of those will turn into a black swan.

The pandemics you listed were different from this one in that they were not nearly as transmissible, even though some were deadlier on an individual level. A lot of people got used to thinking: "that kind of stuff only happens in those kind of countries, not here".

An earthquake in Kansas, on the other hand, would be a black swan. Kansas is not in what we currently understand to be a seismically active region, and thus I don't think it's reasonable to expect Kansas to have the same level of earthquake preparation as California (and vice versa for tornadoes).

In this instance, I think the pandemic was a reasonable thing to anticipate (even if no one could have predicted the actual timing or cause). There were airborne viruses which had made the jump to humans from a wild reservoir in the past. While previous examples were more deadly and less transmissible, the current outbreak was not, as I understand it, far outside the confidence intervals that epidemiologists predicted.

An example of a black swan in this instance would have been an organism that was as contagious as SARS-NCOV-2, but as deadly as Ebola. That would have broken many of our models (which hold that transmissibility is inversely correlated with deadliness). It would have caused us to significantly reconsider our models of viral evolution and disease mechanisms. In contrast, the current outbreak hasn't really caused anyone to reconsider their models of epidemiology. It's played out largely as many epidemiologists warned.

For that reason, I don't think the current outbreak is a black swan, and I think that many of the people calling it a black swan are doing so as an excuse to dodge responsibility for failing to prepare. It's as if I failed to secure my shelves in California, and then when an earthquake hit, and all my crockery spilled to the floor, I claimed that it was a "black swan", because no one could have predicted the specific timing of this earthquake.

One of most catastrophic earthquakes in recorded American history took place in 1811 in a place called New Madrid, Missouri, not far from Kansas. I'd predict that it's going to happen there again.

If it does, I'd still call it a black swan, since the systemic incentives to not prepare for such an earthquake in that area are probably optimized for the short-term.

In vast swaths of both the consumer and industrial economy, the supply chain bean counters have tolerated no argument for choosing anyone besides the low cost supplier.

Cost optimizations were the only rewarded metrics.