A Black Swan Event?
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.
The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a book just prior to the events of the 2007-2008 financial crisis.
Taleb argued that because black swan events are impossible to predict due to their extreme rarity, yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to try to plan accordingly. Some believe that diversification may offer some protection when a black swan event does occur. Investopedia
The massive leveraging of US non financial businesses over the last several decades is utterly incompatible with the stock market cap rising from 62% to 204% of GDP.
The US business economy is now carrying 13X more leverage than it did 50 years ago.
What Has Actually Happened to Business Balance Sheets?
Back in 1972, total business debt outstanding of $634 billion amounted to just 46% of the gross value of US industrial production, which was $1.38 trillion.
By 2007, business debt had soared to $10.1 trillion and stood at 321% of the gross industrial production of $3.15 trillion.
By 2020, the debt figure had risen to $17.7 trillion even as the value of industrial production had remained pinned to the flat line. That is to say, at the end of last year’s Fed-fueled borrowing spree in the US business economy, the leverage ratio clocked in at an off-the-charts 592%.
With this high leverage, growth and profits-generation will become steadily weaker over time. This means that the stock market capitalization rate of the national income should be falling, not heading skyward as described above.
What Has Been The Role Of Central Banks?
Central banks have not merely inflated assets prices. They have also caused the very foundations of financial markets to metastasize, yielding an endless array of new products that have no real economic function except to facilitate new forms of pure wagering.
The larger problem is the risk that an external shock — a black swan — will break the entire chain of dip-buying and options-based speculation and eventually trigger a put-buying stampede.
As one analyst pointed out, the 1987 crash is a good illustration of the risks associated with out-of-control positive feedback.