The Gray Swan Takes Flight


“Gray swan is a term used to describe a potentially very significant event that is considered unlikely to happen but still possible. Because there is a slight chance the event will occur it should be anticipated, particularly as it could shake up the world, economy, and stock market” – Investopedia

This column is written to bring out thinking about potential significant market moving events that may or may not happen. In order to be totally objective and totally unencumbered there can be NO bias. That’s right, no political bias, no market position bias, no historical bias………just a completely objective thought on a potential “Gray Swan Event.”

So, you’re a billion dollar fund manager, a financial advisor, a passive investor, a proprietary firm trader or maybe even a global central banker. How would you position your investments, implement a strategy or hedge your positions?

What if:

  • The U.S. political landscape takes a new twist ahead of the 2020 election? For any number of potential issues, the leading Democratic frontrunners are forced to drop out of the race and Hillary Clinton is asked to run again. Would she defeat President Trump? How would a President Hillary effect global markets? How would you position for such an event?

Thoughts (mine); long financials, long high dividend equities, long commodities (soybeans, corn, grains)………short consumer equities, short energy

  • Iran surprises the world and does a full pivot, agreeing to new talks to limit nuclear development and regional influence. Sanctions are lifted and Iran is able to sell oil on the global markets again. Oil drops to $25/bbl creating massive budgetary problems for other producers. A glut of oil results in industry layoffs and economic growth in many producer countries significantly stagnates. Deflation results with some producer countries having to default on obligations. How would these events affect your portfolios?

Thoughts (mine); Long dollar, bitcoin and gold; short energy (oil) companies, short green energy (solar, wind) companies

  • China decides to “test the West” and asserts itself by sending their military into Hong Kong and simultaneously annexing Taiwan. How would the U.S and its allies react? Would they react? What would happen to the Japanese and South Korea markets?

Thoughts (mine); Short Asian currencies, Long bitcoin and gold; Long defense equities and long cyber security equities; Short commodities (soybeans, corn, grains), long oil

These are just three of many lurking scenarios that are hiding in plain sight, but certainly not widely expected to actually take place; a Grey Swan Event. Remember, a Black Swan event is something totally unforeseen (a meteor crashes into earth, a dormant volcano erupts, etc) that you can’t prepare for. But, a Gray Swan……………..”what if?”

The Gray Swan column will continue to bring up possible market moving and global changing events that may be right in your line of vision always remembering that individual bias may be clouding the vision.

Bill Taylor is Managing Director/CIO at Entoro Wealth & is widely published in financial industry media throughout the world