Black Swans Matter

I know. I know.

Should be obvious — but needs to be said anyway.

I have no objections, in fact, if you choose to include this in your daily affirmations.

Because black swans do matter.

By way of full disclosure, I have, never, in my extensive and varied travels, encountered a black swan of the ornithological type. However, I come by this deficiency honestly, as they are indigenous to the Southwestern Regions of Australia. To which I’ve never been.

Heck, I’ve never set foot inside any part of Australia. Thus, even if one of those dusky, winged beauties took a notion to glide (or fly), North or East — from, say, Perth — to Melbourne, Sydney or the extreme wanderlust destination of Brisbane, it would have made no difference; our paths would not have crossed.

I am thus rendered unqualified to offer an informed opinion about those birdies. As such, this document makes reference to colloquial, and, more specifically, economic, usages of the term, which, for the uninitiated, are defined as unforeseen events that cause acute, unpleasant disruptions to flows in the capital economy. Discussions of the latter are ubiquitous in market circles; investors, quite literally never shut up about these black swans. They are seemingly always lurking around corners, ready to pounce on us unawares, to shove their menacing beaks in our faces, annoying us or perhaps worse.

Sometimes, even, they actually materialize. 2008 comes to mind. And perhaps April of 2020.

And I am somewhat a-feared that a baby cygnus atratus might be waiting to greet us over the next few weeks. Attentive readers will notice that this is a significant departure from my typically perpetual bovine vibe. But I have a hunch that that the intestinal fortitude of me and my fellow perma-bulls just might be tested – ere Q1 runs its course.

Bear with me, if you will, as I set the scene.

A high drama/contentious election just concluded, with one of the parties emerging in control of the Presidency and both Houses of Congress. Lots of folks unhappy about this. Some even threatening and acting in violence.

Markets ended the preceding year in full ascent, and the trajectory extended into January, with a big part of the rally owing to the continued support of the almighty Fed, and the anticipation of all form of accretive policy goodies emanating from the newly installed regime in Washington.

Yes, sometimes I pine for those simpler days of early 2017.

But hold the phone. Four years later, we find ourselves with the exact same set of conditions.

So, I thought it might be useful to look at what happened next, in that cycle of a quadrennial ago.

The Gallant 500 and its fellows were rolling along quite nicely, when, in early February (in cruel irony, less than a week before Valentine’s Day), Vixen VIX, with whom we are perpetually smitten, and to whom we always return no matter how badly she uses us, flashed her womanly fires, and exploded to more than three times her prevailing temperature — over the course of a single session:

Now, of course, as gentlemen, it falls to our lot to forgive her this outburst; she’s entitled to it, and we most certainly deserved it – if for no other reason than (as the chart shows) we had been ignoring her for much too long. In the end, we always make up, and are rendered better for the experience.

But that doesn’t mean it didn’t smart. A lot. We took a stone-cold pounding – to the tune of more than 10%, with no identifiable catalyst (was one needed?) other than the fiery wrath of Vixen VIX, who, when she so chooses, can transform herself from sultry siren to beautiful black swan. And after that, all is at least (temporarily) well. The episode I just described, for instance, caused an indecorous retreat of the Gallant 500 from nearly 2900 to under 2600. Where is it now? A spiffy 3841.

And I kind of have a hunch that something of this nature, something familiar, something peculiar, something for everyone, may be in the offing. Might or might not be caused by Vixen VIX, but if it does transpire, you can be certain that she will be present and active on the scene.

Of course, there’s a lot of fodder out there to catalyze a correction; too much fodder, in fact, to inventory in these pages. Let’s just state that if the market were to take a respite any time and even give up some ground in the next few weeks, we may not need to search far for root causes.

But what’s more interesting to me is the scenario where the black swan catches us off-guard. Maybe due to an unexpected event, or, maybe, because it is the will of the market gods.

And in addition to the unending onslaught of headline news flow (to say nothing of the impacts of the continued high mourning of the passage of New York Dolls guitarist Sylvain Sylvain), in terms of the more time-honored market-moving catalysts, we actually have a big week coming up.

We begin with earnings, which, particularly quarter over quarter, have been surprisingly strong thus far. But sh_t is about to get serious, as this week’s playbill features data drops and associated CEO utterings from many of our most important filers, including Apple, Microsoft and Facebook. These uber tech disclosure cycles have risen to thresholds sufficiently vital as to cause the schedulers to mercifully split the sequence across two weeks. We’ll thus have to wait an extra few days to hear from Alphabet and Amazon.

I reckon it’s OK, though, because we will have plenty of numbers to crunch in the meanwhile. I myself will be paying closest attention to the Thursday release of the first estimate of Q4 GDP, which ought to be interesting to say the least.

The folks in Atlanta (so recently the epicenter of our political psychodramas) have been busy with their tabulations, and here’s what they have to tell us at the point of this correspondence:

One can justifiably wonder if the denizens of that great metropolis might not benefit from a little arithmetic refresher course, as, since early November (!), their estimates have risen from a paltry < 2%, up to double digits, before falling to the perhaps more reasonable and certainly more civilized threshold of 7.5%.

One way or another, it bears watching. Particularly in advance of so much rapid-fire fiscal policy change looming on the horizon.

But I’m gonna step back into character here and state that even if the market takes a digger here, we’re looking, over the next several quarters, at a significant upward spike. The money drops that have already taken place are breathtaking. Those contemplated, on an incremental basis? Mind blowing.

And, come what may, the math suggests that much of this largesse will glide over the smooth, lagoon-like waters, into risk assets — taking valuations, and the very tide itself, to higher elevations. I see one of two scenarios emerging. Either the virus digs its heels in, and wider lockdowns ensue, in which case all sorts of unspent stimulus cash finds its way into stocks, bonds, real estate and bitcoin. Or the gates open up, as, for whatever reason, covid gets curtailed or is canceled altogether, which should lead to a spending/profits/valuation explosion.

We’ll pay for all of these sins someday, maybe soon, through the wages of inflation, but won’t clamp down on it until it’s raging out of control. Meantime, it’s game on.

But of course, there are those black swans to consider. As we’ve already established, they do matter. Maybe a lot. And though it’s just a hunch, I’m a little concerned that a flock of them may be following the trade winds, to alight, without advance warning, on these here shores. They’re dark, they fly at night, and there’s a good chance that, as such, we may not see them before they arrive.

So be forewarned.

Because unlike some ducks I’ve observed at certain watery locations in Central Park, they rarely, if ever, sleep till noon. Nay, they rise early, and it’s best – now and forever to fortify ourselves to address them on some early morning in the near, or not-to-distant future.

TIMSHEL

Posted in Weeklies.