Last week I wrote to my trading service subscribers that most of the hurdles facing the stock market were out in front of us, that we could see them, and that as long as the market climbs that “wall of worry” the path of least resistance for stocks, for the moment at least, appears to be up.
However, the known worries aren’t what worry me – it’s the black swans.
That led to a lot of people asking, “What black swans?”…
They’re Out There
There are plenty. But the nature of black swans is that we supposedly don’t know what they are.
I don’t buy that, nor or any of The Black Swan author Nassim Nicholas Taleb’s other theories, for that matter.
The whole black swan thing is about real black swans.
Forever and a day, everyone thought all swans were white. It was a given. There’s no such thing as a black swan.
Then, sure enough, black swans were discovered in Australia. Now we know there are black swans. That’s the thing about black swans – they’re not out there, until they are.
Black swan events aren’t unpredictable.
Take the markets, for example. We know that things we expect to work sometimes stop working.
The May 6, 2010, Flash Crash is an example.
My biggest black swan market fear is that terrorists, jokesters, or something in-between – like a mad nation-state to prove it can – “black-swans” the market.
We know it can happen. It happened in the Flash Crash. I’m not saying that was a cyberattack. I don’t think it was. But it could have been. We don’t really know what caused it.
The regulators have never come out with an explanation.
That’s what worries me. They know what went wrong and they’re not telling us.
What triggered the 1,000-point Dow Jones Industrial Average drop in a matter of seconds is secondary, though I’ll come back to that.
What’s important is that regulators can’t come out and say why what happened was possible in the first place.
There’s a difference – and it’s very important.
Whatever triggered the drop is secondary to the fact that stocks fell 1,000 points because systemic changes in how markets operate, mechanically, made it possible.
The long and short history of those changes has to do with the proliferation of electronic trading networks, competing exchanges, decimalization (trading in one-penny increments), high-frequency trading and the “unintended consequences” of other mechanical changes in markets.
So, the 2010 Flash Crash happened because it’s a possibility now. That’s what’s scary.
There are real ghosts in the machinery.
All it takes is a trigger to turn currently benign friendly market ghosts into black swans.
So, yes, a cyberattack could trigger a market crash. Because the black swans in the markets are actually sinkholes that we’ve let settle into the market’s foundation.
Sure, there are “circuit breakers” and all kinds of safety switches that will slow markets or halt trading if bad things happen.
But if a building can collapse because its foundation has been undermined, outside supports can only last so long.
Our markets are prone to cyberattacks, and our markets are mechanically unstable.
That’s the biggest black swan I can see.
And I’m not the only one who can see it.
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