Is Wall Street Poised for Another Black Swan Event?

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By Jacob Maslow

black swanWhat is a black swan? For the longest time, conventional wisdom held that there is no such thing as a black swan. For hundreds of years, people thought that swans came only in one color: white. Recently, a biologist has discovered relatively very rare black swans. It only takes one black swan to destroy a long-held conventional wisdom.

It is quite appropriate that the great financial crash of 2008 is often ascribed to a black swan event. Nobody knew that one of the world’s biggest investment back, Lehman Brothers, would go belly-up. Traders knew that there was a problem with sub-prime mortgages and a problem with financial markets and banks not trusting each other. They just didn’t know the exact trigger that would bring the whole house of cards down.

You have to remember that in the run-up to the crash of 2008, the market was peaking. It seemed unstoppable. People were just pushing up the price of stocks. The prices of homes were exploding in many property markets. However, if you look back, you can see that there are clear trouble signs. There were some real property markets that were in serious trouble. In fact, the market already responded with a small crash regarding sub-prime mortgages. However, it took the highly unlikely event of a major investment bank crashing and burning to really wake everybody up.

It doesn’t take a genius to figure out that we are living in a bubble economy. American equities markets and many other equities markets all over the world are skating on thin ice. There is not enough real economic activity, value, and growth on Main Street to justify the inflated equities values on Wall Street. The other shoe will eventually drop. The only open question is will the trigger be a black swan event that just comes out of nowhere that totally blindsides everybody? Or will it be something more predictable?

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