The market, of course, refers to black swan events (and you can get the full history of the term elsewhere) as, so to speak, unexpected, off the probability curve events that lead to extreme market volatility. But I would argue usually they aren’t really actually that unexpected. Often in fact they are even quite predictable geo-political or as I refer to them on this site macro-political risks that a fuller focus on political risk or group psychology concerning asset bubbles would reveal as if not entirely predictable then again not entirely unexpected either. Now its possible like the great trader Mark Spitznagel to simply create a fund or market instrument that will pay off spectacularly when any of these events occur as they regularly do every 6-12 years or so, but here we seek a more nuanced and specific recognition of market risk.
If you go back through earlier posts you will see that I regularly talk about such risk, For example things like asset bubbles are discussed often or the risk of tariffs to market volatility or inflation risks are all discussed earlier than by most commentators or even such mundane subjects as the risk of tariffs to Asian supemarkets which I mentioned way before it became a regular featured news story at least for a while on the evening and print news.
What I plan to do though is make all this. a bit more formal and try to post regularly a list of a few though certainly not all such risks and then reconsider those risks periodically. so here goes with such an abbreviated list and far from complete list:
1. War in the middle east. Israel’s ready to go after Iran’s nuclear program. Trump has given them the bunker buster bombs they needed, if the press reports are accurate, which Biden would not do but paused such an attack to give diplomatic talks a chance which are currently proceeding. Such a war could easily disrupt a huge percentage of the world’s oil. It could also cause broader economic turmoil from things like oil shortages and inflation from super high oil prices and is not priced into economic models or especially oil stock valuations.
2. China decides to wait out Trump’s presidency and, I believe incorrectly, misjudges current Republican strength. No deal is reached on tariffs and they do everything they can to thwart the tariff regime. Europe covertly joins in with the same strategy. Without the deals the market is counting on stocks slide. They view the potential to rally political support against the U.S. as more valuable than economic gain something not impossible after Xi’s movement towards a Maoist model in recent years where party power has been repeatedly put before the earlier model of economic growth as the top priority. Trump misunderstands all of this because at the end of the day he assumes the perspective of a businessman and a predictable economic outcome that does not occur. In such a scenario the S and P could easily test 4500 or 4200 0r 4000.
3. The courts and Supreme court consistently block Trump’s plans or Powell and the Fed do not lower but when tariffs kick in actually raise the interest rate. Neither of these is out of the question nor a situation where the executive branch and courts or Fed challenge each other’s authority something even the framers did not really provide a good remedy for. Either of these scenarios and extreme market volatility.
4. The Democratic Socialist wing of the democratic party seizes control of the party and nominates Ocasia-cortez for President and though I think this is highly unlikely she wins. What does that do to any long term predictions about Wall Street? Unlikely right now given polling? Yes. Impossible in 4 years? No, not completely
5. Zelensky continues to reject U.S> peace proposals and Trump as he has threatened refuses to continue to support the war. The war escalates and the Europeans try to fill the void created by America’s withdrawl. Sanctions on Russia increase not decrease. The risk of a broader war in Europe as the E.U. ratchets up support and Putin’s forces advance increases. What happens to the markets at the point that Ukraine falls entirely to Russian control? Is that rather than a stalemate model possible? Unfortunately, yes. What does that do to European markets?
6. Tariffs kick in and China escalates and major businesses like Wal-Mart, Target, Asian grocers, and countless others start to go bankrupt unable to continue their cheap import model. The more likely model is a bunch of trade deals and the markets go up and I believe Trump’s assumption is he can always take the tariffs off quickly and he can, it is a very flexible tool. But say for the sake of argument, and I think this is unlikely China tries to annex Taiwan. Then what?
7. The asset bubble I’ve long warned about in key areas of the market ends and stock prices in those stocks plummet like in the dot.com crash or the Fed raises rather than lowers interest rates and the housing market crashes or key American cities can no longer support as they don’t come back high valuations and real estate crashes. The Fed would then lower rates to be sure and Trump is an active president and would respond quickly but are those impossible black swans? No, not at all.
8. A highly disruptive event like 911 occurs again. Our open border policy, whatever one’s particular politics on such things as immigration is, has certainly, anyone wold acknowledge significantly increased the risks of such an event. What would that do to the markets.
9. Like during Covid and I think this is highly unlikely but still possible chaos once more is unleashed by the left in cities across the U.S. Trump having failed to aggressively respond the first time this time goes all in with a very heavy handed response. The situation escalates even if ultimately resolved by order again. Markets are ignoring such possibilities entirely in their risk analysis.
Now what you’ll note is that all of these black swan events are not really entirely unknowable in the sense that they cannot be predicted and considered as possible scenarios. Also they are almost all ultimately caused by political or group psychology not strictly speaking economic events. As such most market participants largely ignore them. Then they act totally surprised when they occur. Mores the pity, but there’s alpha in not ignoring them. In any case if any of these scenarios ultimately occurs don’t say you had no warning they were possible nor would it be unwise not to be alert for such risks emerging and consider how one would need to respond when possible to each potential market scenario way before any such black swan event occurs.
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