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Financial Black Swan Events

December 5, 2016

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A Black Swan financial level event is one in which something either unforeseen or very unlikely happens where the market was not prepared for.  The phrase was first coined by Nassim Nicholas Taleb during the financial crisis of 2008 and in reference to a Lehman like event.  While these level of events are few and far between historically they have increased dramatically over the last few years.  Typically, a catalyst happens that then triggers a large sell off in the financial markets.  These catalyst can be anything from an economic report, political uncertainty, trade agreement, major company failures, or terrorist attacks.  For example, Black Swan level events that may trigger a market sell off could be 1) European uncertainty 2) Banking failure such as Deutsche Bank collapse 3) China slowing growth or housing bubble burst 4) Central Banks aggressively raising interest rates.  However, the purpose of this post is not to discuss what might trigger the next sell off, rather a quick look at the history of Black Swan, its impact and how it has changed.

Historical Look at Black Swan:

  1. 1997: Asian Financial Crisis: This was a crisis that led to mass devaluation of Asian currencies, sparked a short term currency war that also led to international stocks plummeting.  The crisis lasted a little more than two years and ended with the help of billions of loans from the IMF, billions in stimulus programs (Keynesian) and interest rates being lowered across the board.
  2. 2000: Dot Com: The most extremely over-priced market place in the history of the United States modern financial markets was the dot com market.  This was a market where traditional valuations of PE Ratios, cash flow, debt, growth were thrown out the window.  Buy the dip mentality galore.  However, a year and a half later, the NASDAQ is down close to 80% and most of the dot com companies are out of business and trillions in investment capital was lost.  While I do not believe the Dot Com was a black swan event due to the obvious lack of fundamentals in the tech sector, the terrorist attacks on September 11, 2001 was certainly a Black Swan event which ended with loss of over 10% in 5 days and and estimated 1.4 trillion in lost capital.  Lasted over 2 years.
  3. 2008: Sub Prime Market: Although the market in 2008 was already in a bear market from early 08  through the summer Lehman brothers filing bankruptcy on September 15th of 2008 was a Black Swan event in that the market was not prepared for it but also due to the aftermath.  From October of 2007 through September of 2008 the SPX went down 286 points.  One month after Lehmen the SPX went down another 400 pts with the bottom five months later at 666 in the SPX.  Lasted 1.5 years
  4. 2011: Fukushima Disaster: One of the largest nuclear energy disasters in history sparked a sell off in the Nikkei of 16% that also led to Prime Minister Abe’s massive Abenomics stimulus program of our 80 trillion yen yearly as well as bond and stock purchase programs.  It took two years for the Nikkei to recover.
  5. 2011: European Debt Crisis: In August of 2011 it became widely know how bad the debt crisis in Europe began.  With the PIGS leading the way the southern European states of Portugal, Italy, Greece, and Spain too far in debt in regards to GDP and not able to pay back the EU, IMF, and Germany.  The result was bonds prices spiking, bailouts galore, the dollar swap and two years later the market recovered the drop in price.

There is commonality in all these events in that 4 of the 5 events the black swan event happened after the markets were already going down.  Did someone know something???  In these cases, the black swan event simply carried the market to its finish line.  The second thing that is common in all of them is that the central banks and government will act.  Government will always apply Kenyesian economics in an attempt to stimulate the market and the central banks will lower interest rates.  This leads to markets bottoming out and is a buying opportunity.  As Buffet states, be greedy when people are fearful.

However, something has changed in the technical and information era.  It seems that there has been an increase in Black Swan risk and speed of recovery after the event has been even more dramatic.  Take a look at a couple of situations over the past couple years:

  1. Jan 15, 2015: The SNB decides to lower interest into negative territory and de-pegs from Euro.  This led to massive sell off in the forex market with the USD/CHF pair declining by 1,818 pips or about 15% in hours and the Euro and Yen even more.  Trading in the forex market is halted as trillions are lost in valuation.  1 month later it was almost like it never happened.
  2. Aug 24, 2015: China announces slowing growth which is a huge Black Swan risk on all economist watchlist of major risks that if played out would have dramatic impact to the global markets.  The SPX is down over 8% in one day, bears are coming out of a 6 year hibernation…just to get slaughtered in a 3 day recovery.
  3. Dec 16, 2015: FOMC raises interest rates by .25% for the first time in decades.  The market actually increases in value by 124 points due to changes in policy language.
  4. June 2016: Brexit…markets tank down 6% over night.  8 days later it has recovered.  Very similar to China slowing down, European political stability or the lack thereof is a major Black Swan risk and it took 8 days to recover.
  5. Nov 9, 2016: Trump is elected as President of the United States in an election that almost every poll had it wrong.  The markets start tanking once the polls start coming in, mayhem everywhere in the financial world and…..a couple hours later the market has rebounded from down 5% to up 2% and the /DX up 3% which is the dollar index.
  6. Dec 4, 2016: Italy soundly rejects constitutional changes and Prime Minister Matteo Renzi announces he will step down.  This is yet another potnetial black swan level risk of political uncertainty.  The EUR/USD over night is down 166 pips followed by a rocketed rise of 300 pips to act like in never happened.

Each of the above are examples of Black Swan catalyst that never played out historically as Black Swan.  The question is why?  Why have we seen an increase in catalysts but a decrease in impact?  There is no denying the fact that there will be another bear market, another bubble burst and another catalyst that will be seen historically as the trigger.  However, all we know is we have been seeing them for close to two years now and they all came and went away like it seems most European leaders are doing today.

3 Replies to “Financial Black Swan Events”

  1. Great article. I’ve been asking myself the same question since Brexit. I just hope I’m not asleep the time it doesn’t bounce back. The hedging and risk controls will pay off at some point.

  2. Mak says:

    Thank you anonymous.

    imho it seems that Wall St are laboring to artificially keep markets up so they can simultaneously collect commissions and tell their inactive investor clients “buy more, all in even, hold longer, forever even, invest for the long term” as all major indices flourish through these black swan events in spite of the fear mongering nuts talking about some crash. Rich Dads Prophecy put it well. The wolves of Wall St want as many chickens as fat as they can possibly have ’em in the coup so their feast may be great when they take off their sheep skin costume for the grand finale.

  3. ERICSIMMS says:

    Excellent historical analysis, and very informative. I don’t know to what extent these black recent swan catalysts have been stymied by low or negative interest rates, China instituting a moratorium on selling and shorting stock positions in the Chinese markets, banks using smoke and mirrors to hide their shaky finances and floating each other loans under the table, and a whole host of other manipulations and magic tricks. At this point, it seems like house of cards held up by tooth picks.

    Floating the theories of a great Wall Street trader, Paul Mampilly, he thinks the markets will rip higher at an exponential rate because of the huge millennial population that is hitting the sweet spot in their financial growth and they are the largest population segment in the US and the world overall. He believes that the stock market will be minting millionaires galore over the next 20 years with hardly a pause. His additional support theory is that the world is bringing their investments to the stable and steady US markets, which trillions from abroad must lift our markets no matter what the black swans do. That is another way to look at it, for sure.

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