A black swan is Wall Street lexicon for an unpredicted event. The author of that concept, Nassim Taleb, opines that most of the major moves in stock market history originated as black swan events coming out of nowhere, with a random, stochastic disorderliness that pushes markets into wild gyrations and implosion.
But subliminally, everyday, CNBC and Bloomberg market mavens reassure us that the market hovers only a few percentage points off all time highs, that unemployment is moderating, and projected GDP, if not robust, is certainly positive.
Still, outliers like Ron Paul endlessly pontificate that we are living in a fairy tale house of cards.
The Fed has pumped about $4.6 trillion into our economy—“quantitative easing,” a term Ron feels is printing money out of thin air. What bothers the former Congressman is that the Fed won’t submit to a real audit, and he suspects it is hiding something far darker. “If the Fed has nothing to hide, it has nothing to fear.” [1]
So what is it hiding? The Fed may have surreptitiously lent $16 trillion to foreign banks completely under the radar and without any approval of anyone. Says Bernie Sanders “No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the President.”[2] The Fed may have done exactly that.
Just to keep these numbers in perspective, the total value of the entire U.S. economy, $17.4 trillion, is less than what the Fed may have been printing, unaudited, and all by its lonesome since 2008.
U.S. total public, personal, and corporate debt is now $60 trillion, [3] and to a few cognoscenti, there is a palpable sense of teetering. Puerto Rico is running out of cash. Illinois struggles to pay pensioners while avoiding insolvency. Detroit is already in receivership. Irvington, Harrisburg, Oakland, Providence and a host of other municipalities are close behind. [4]
But just where would a flock of black swans originate? Certainly Detroit is not going to tank the entire U.S. economy.
At the beginning of George Bush’s presidency, the total global derivatives market —credit default swaps, mortgage backed securities, forward contracts, currency swaps and their inscrutable mathematically murky cousins—amounted to $4 trillion. When Bush got finished with us, that is, when 8 million Americans lost their jobs and 3 million Americans lost their homes, the derivatives market had soared to $585 trillion. [5] Kind of a jump and certainly a very lucrative gaming house.
When Obama took office, most thought he would bring these excesses under control and initiatives like Dodd-Frank or the Commodity Futures Trading Commission would shutter, or at least reign in, this egregious casino. Not so fast. The five leading “too big to fail banks” actually grew 28 percent bigger than when Obama took office. [6] And the global derivatives market swelled to $1.5 quadrillion. [7]
Say what?
That’s right, it more than doubled in size since Dubya! A quadrillion, by the way, is a thousand trillion, and if you want to write it, try a 1 followed by 15 zeros. The value of the global derivatives market in 2015 is 30 times larger than the entire global economy.
As Janet Tavakoli of Tavakoli Structured Finance said in the Financial Times of London, “We’ve reformed nothing. We have more leverage and more derivatives risk than we’ve ever had.” [8]
Just to send shivers down your spine, take a more clinical look at J.P Morgan Chase. One of those too-big-to-fail banks, it has $1.8 trillion in assets, but a $69 trillion exposure to the derivatives market. In the language of gaming, for every dollar in your pocket, you have 34 you can leverage at the roulette wheel. And so it goes with Citibank, Bank of America, Goldman Sachs, all with similarly bloated credit lines. [9] Think of it: one bank, Chase, with one CEO, Jamie Diamond, is holding—read speculating, playing, gambling with— a basket of derivatives four times larger than the entire U.S. economy.
A black swan is, by definition, an unpredictable event. Barings Bank, a storied English institution founded in 1762 had a rogue broker in Indonesia placing bets in the currency market. He lost $1.3 billion. Within days the fabled institution was liquidated—sold at auction for £1—and Barings vanished while its bone-headed trader, Nick Leeson, hightailed it out of the country. [10]
Glitches happen. Mistakes happen. Random events happen. Leveraged bets go bad.
Black swans happen.
On July 8th the Chinese stock market was imploding. The same day the New York Stock Exchange halted trading for over 3 hours; a glitch. United Airlines grounded its airliners—another mysterious glitch. On the heels of that—and still on the same day— the Wall Street Journal website went down too. [11]
Sometimes things get out of hand. Sometimes random events fly into the face of order, security, and stability.
A mere 2 percent “glitch” in the global derivatives market, says Paul Ferrel from Market Watch, could ignite an unthinkable financial weapon of mass destruction: “ . . . this entire unregulated derivatives market is like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It’s only a matter of time.”[12]
By the way a 2 percent glitch in that market is twice as large as the entire U.S. economy.
So, perhaps we can relax and even swoon over those salutary reassurances that unemployment is down, earnings are rising, markets are up, yes Greece is in trouble, but the U.S. economy is the strongest in the world—Ah, the comfort we can take!
But maybe we need to keep one eye peeled for a flock of black swans heading our way.
Our house is built on a foundation of $60 trillion in public, private, and corporate debt, and somewhere out there on a distant, shadowy archipelago, the $1.5 quadrillion derivatives market awaits one false move, one unpredictable bet, one computer miscalculation, one highly leveraged wager that goes belly up, one more Nick Leeson.
That’s when perhaps we’ll be able to see more clearly what happens when a black swan flies directly over a house of cards.
Notes.
[1] http://www.ronpaulinstitute.org/archives/featured-articles/2015/january/18/if-the-fed-has-nothing-to-hide-it-has-nothing-to-fear/
[2] http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/
[3] http://rt.com/usa/166352-us-total-debt-sixty-trillion/
[4] http://www.newsmax.com/US/cities-bankruptcy-after-detroit/2013/08/06/id/519081/
[5] http://www.slate.com/id/2202263/
[6] http://articles.latimes.com/2013/sep/17/business/la-fi-too-big-to-fail-20130917
[7] http://themillenniumreport.com/2014/07/will-the-1-5-quadrillion-derivatives-market-collapse-in-2015/
[8] http://www.newsmax.com/Finance/Wall-Street-Derivatives-Games/2014/08/19/id/589727/
[9] http://theeconomiccollapseblog.com/archives/the-coming-derivatives-panic-that-will-destroy-global-financial-markets
[10] http://content.time.com/time/specials/packages/article/0,28804,1937349_1937350_1937488,00.html
[11] http://www.politico.com/blogs/media/2015/07/wall-street-journal-website-down-amid-nyse-united-210137.html
[12] Paul Farrell, “Derivatives the new ‘ticking bomb.” http://www.marketwatch.com/news/story/derivatives
