Black Swan: A highly improbable event with three principle characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable than is was.
It would have been late ’72 that I had a cocktail conversation with an old salt who’d been a broker the thirties. I was bullish. “I don’t know,” he said, “I think there’s speculation.”
Didn’t mean a thing to me. There’s always speculation. That’s what we do, I thought. But he was talking about something else, a mindless, cautionless, plunging-a mania that I couldn’t see because I was naively caught up in it myself.
A mania is not necessarily a hair-on-fire compulsion to get-into-the-market-before-it soars experience, although it certainly can be that. It can also be a moment when there is unanimity of opinion. No fear, no second thoughts, just a wide-spread agreement that being fully invested in a market that is outrageously overpriced is the proper thing to do., and calmness prevails.
We have this calmness now, despite growing evidence that the economic support for the stock market is eroding.
A number of issues back, I compared investors’ calmness to mountain snowpack:
On a sunny day, the snow on a mountainside presents a picture of stability. But, beneath that serene white blanket, minute cracks are forming to weaken it. The longer it remains on the mountain, the more ubiquitous the cracks under the surface, until the snowpack reaches critical state. When this happens, scientists can predict that an avalanche will occur. They just can’t predict when the last snowflake will float down from a cloud to precipitate it.
My view is that we have reached critical state in the markets one more time. My old salt friend recalled an earlier one. “Who could have predicted it: the London pepper market cracked in ’29. It brought the whole thing down!” Today, we name these “unpredictable” catalysts Black Swans.
It is not the last snowflake, but the underlying condition that creates the highly impactful event. We are primed for one now. No telling what it will be, but afterwards, we’ll all say, “Of course! It was obvious!”
August 11, 2015: The Chinese did an extraordinary currency devaluation overnight, signaling panic. Something we may, after the fact, name a Black Swan.