10.10.2016
By Rob Daly

OPINION: Let the Black Swans Go

The financial markets need to retire the “black swan” concept before Wall Street becomes inundated with a bevy of the ornery birds.

When markets follow established patterns and performance, an outlying event easily could be a black swan, but that has not the case since the 2008-09 credit crisis.

Today’s market is not the new normal. The U.S. Federal Reserve, the European Central Bank, and the Bank of Japan cannot keep interest rates hovering around zero indefinitely. For the past eight years, they have been peeling off the adhesive bandage slower than any time in history.

In the meantime, the market continues to deal with the unintended consequences, which should not be considered black swans.

On October 7, the British pound lost 6% of its value against the US dollar to a 31-year low of $1.1814 for a few moments in early Asian trading before bouncing back to $1.2421 in subsequent trading.

Since the return to floating exchange rates after Bretton Woods, the pound’s value has never fallen 6% against the dollar, except it has. And if it has happened once, it can happen again.

The Bank of England is investigating the event, according to press reports and likely will find who intentionally or unintentionally caused the massive drop. It is in the same situation as the US Securities and Exchange Commission and the Commodity Futures Trading Commission were just after the May 6, 2010, flash crash in US equities.

Will the BoE find its Waddell & Reed? It most certainly will since it must protect the integrity of the pound. Whether a single action could have precipitated the entire event is another matter entirely.

A more appropriate description for the markets would be “the fog of war.” The continued zero-rate environment, market-structure and regulatory changes, and technological innovations have thrown the old playbook out the window and has everyone scrambling to understand how

While everyone is trying to learn the new market nuances, what the do learn has a relatively limited shelf life. Anything learned over the last 12 to 24 months easily will be outdated in another 12 to 24 months. Anything identified as a black swans during this period most will not be an outlier, but the latest market evolution.

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