A Gray Swan(s) is Flapping its Wings Again


Most everyone knows what a Black Swan event is, right? It’s a completely unforeseen event that nobody could see coming. Like an undiscovered asteroid crashing into earth. But most people are unfamiliar with what a Gray Swan event is. So, here is the “official” definition;

” A Gray Swan event refers to an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring. Often recognized in hindsight, individuals assume the risk of a gray swan event when they invest in financial markets.”

One of the main characteristics of a Gray Swan event (or events) is that, before an actual event is fully recognized, it is pretty clear and obvious to most people. But, reality being reality, most people will ignore the obvious, or refuse to believe that such a Gray Swan event could actually happen. Certainly the media is also reluctant to accept the simple signals existing in plain sight. The media mostly downplays most peoples’ perceptions. In other words, some things are just too unfathomable to accept.

Currently it seems that there is not just ONE Gray Swan event unfolding but MULTIPLE Gray Swans flapping their wings. (Which, I guess, means if you didn’t see multiple events unfolding concurrently all this is actually a Black Swan?) As these swans’ wings flap, most everyone now recognizes the events they all should have been aware of; inflation, real estate prices, war, financial markets, shortages and…..well, I guess the COVID government reactions could not have been foreseen nor their unintended consequences.

Yeah so! Now that these events are being recognized they no longer can be considered a Gray Swan. Right? Well, no. Those previously mentioned events are only partially over. What is staring us right in the face are the possible ramifications of what’s happening. Again these are possibilities that should not be ignored but are unfathomable to really believe. Think tsunami insurance before you head for vacation on a beach bordering an active volcano. What could possibly happen?


Let’s start with inflation. Remember when inflation was supposed to be ‘transitory?’ Even Fed Chairman J. Powell didn’t bother to check what was going on in the commodity markets (or supermarkets) and now recognizes a severe problem. Will inflation go hyper-speed? Will ever increasing prices for daily basics (gas, food, travel, etc.) cause more civil unrest here in the U.S.?


Shortages. These supply shortages and disruptions were supposed to disappear with the end of COVID restrictions. Alas, no. If anything, the Ukraine situation has only exacerbated shortages. Not only here, but around the globe. When you can’t pay ANY price for something will people riot and weaker governments topple? Will rationing become mandated?


Financial markets. Oh my. The big Mama of Gray Swans. Twelve years of a “buy the dip” bull market in equities with ever increasing valuations and rosy forecasts sure send up warning flags. Many traders and fund managers have not experienced a bear market. Will algorithms based on past results and trends become “flawed” and unpredictable? Will the ever widening gap between “real” interest rates and increasing inflation levels trigger an eventual interest rate spike? Or, will inflation plunge?


War. Not just Ukraine vs Russia. The Gray Swan notes that the Russian position on Ukraine has been highly visible since at least 2008. This Gray Swan event actually became fact. Will the war drag on? Spread? Go nuclear? This Gray Swan has the definite possibility of being actually a Black Swan in waiting.


One other potential Gray Swan event seems to be unfolding that (characteristically) is going unnoticed. While most people will focus on one specific event (COVID’s out….Russia is ‘in’….next?) looking at multiple events in conjunction presents a different picture. Government responses to the pandemic showed that new emergency powers can be an “eye opener.” Seizing, or freezing, of personal assets and bank accounts actually are a new tool in government policy. Couple that with shortages/inflation, unpopular government mandates, protests/civil unrest and lack of trust in the electoral process.

Would these events and a prolonged war result in the government declaring martial law? Its a low probability, but that’s a Gray Swan. Unfathomable thought? That’s a Gray Swan.

Is that the flapping of wings I hear?

Bill Taylor is a long-time market participant and seat-holder via the Chicago exchanges, a highly published thought leader on cryptocurrencies and derivatives, and currently CEO of Digital Wealth News