By Ross Silver, Principal

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist – a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.

The theory was developed by Nassim Nicholas Taleb to explain:

When the phrase was coined, the black swan was presumed not to exist. The importance of the metaphor lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the logic of any system of thought, as well as any reasoning that followed from that underlying logic. Hopefully you are still following.

In the past three months we have experienced not one, not two, but three black swan events. COVID-19, Oil prices turning negative and the social response to the atrocity that occurred to George Floyd are the three black swan events. Somehow the equities markets are moving higher despite these three black swan events seemingly defying all logic. Why? 

There is a false sense of stability in the “the economic system” here in the U.S. That false sense of stability is leading to investment from investors in other countries who are too worried about their own economic systems and as such parking their money into U.S. equities. That is one pillar supporting and buoying equities prices. The second pillar is the “Fed Put” which in layman terms means the money printing press that the Federal Reserve has deployed to stabilize and buoy the economy. The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act, which created the Federal Reserve or “Fed” in 1913: maximizing employment, stabilizing prices, and moderating long-term interest rates. Well, unemployment is near historic highs, prices are volatile and long-term interest rates are a joke. This brings me to pillar number 3, the bond market. Anyone investing in bonds for yield is kidding themselves. The only purpose of bonds at this point, given yields are abysmal, is to serve as parking spots for those confused by the current economic environment. 

Let’s take a look at fund flow data: https://www.yardeni.com/pub/ecoindiciwk.pdf

Fund flow data is not painting a pretty picture. Will this change? Perhaps, but one data point I follow very closely is fund flows. When flows are up, usually a bullish sign, when flows are down, bearish sign, so what are we to do? If you believe in the economic system and those running it, long and strong is the way to go. If you are confused by the economic system and have little to no faith in those running it, time to get short and pray. Just remember the old cliché, escalator up and elevator down.

Tickers we are watching: FRSX, POAI, MYOV (huge move this week ☺), PPCB & JAGX