Black Proof
Black Swan Author Nassim Taleb And The Stock Market Flash Crash
The title of the book that seems to examine stuff no one thinks can happen – like last week’s high speed trading meltdown of the Dow Jones Industrial Average – is called Black Swan. Author Nassim Taleb, of the book “Black Swan: The Impact of the Highly Improbable,” describes the rise of the Internet and the September 11, 2001 attacks as examples of Black Swan Events. In Black Swan, Taleb’s argument is that since Black Swan events cannot be predicted, society should at least try to practice policies that may minimize the damage of events, like the Wall Street flash crash, when they do.
Wall Street’s Black Swan
Various media are calling last week’s stock market flash crash a Black Swan event. Interestingly, The Wall Street Journal is reporting that the advice from hedge fund manager Nassim Taleb’s advices made a huge stock market bet that could like be related to the near-shattering market selloff, when the Dow dropped almost 1,000 points in just a short amount of time. Instead of turning to fast cash loans, Investments LP acquired 50,000 options that would pay off should the stock market drop off a cliff. According to the Journal, the panicked selling may have been fueled by the buy. The Greek debt crisis is already sending many investors running, so all it took was one huge bet on failure to send them completely out the door. They trampled each other on the way out, because of high speed trading.
Black Swan author Nassim Taleb speaks
Black Swan author Nassim Taleb showed up on CNBC Wednesday to talk about the Wall Street Journal’s Black Swan theory and the flash crash. He declines being linked to Universa’s Wall Street gamble. “I don’t know anything about Thursday’s event,” Taleb said. “I don’t have enough facts to say whether the collapse was a Black Swan event.” Taleb said that since he gave up every day trading a year ago, things have changed for the worse. His response:
The world is vastly more fragile than it was when I left it. The crisis of 2008 was caused by debt, hidden risks and irresponsible risk management. We have more debt, more irresponsible risk management and a lower tax base and more hidden risks.”
About the Black Swan
Black Swan wasn’t coined by Nassim Taleb. The term has been around since ancient times to describe improbability. Swans are almost always white, but every once in a while a black swan is hatched for no apparent reason. Taleb makes use of the term to focus in on the markets. In “Black Swan: The Impact of the Highly Improbable,” he seems to predict a global financial collapse. Taleb says that the globalization of the financial markets has, in fact, crafted that threat. The rest falls like dominoes once one financial giant makes a plunge.
What will the next Black Swan be?
Taleb says that Black Swan events, given their unpredictability and improbability, cannot be prevented. But last year, Taleb appeared to have the ability to see into the future when he listed “Ten Principles for a Black-proof World” in the Financial Times. But it may be too late for markets, governments and the public at large. When he appeared Thursday on CNBC, Taleb said that the government should shoot for a surplus – definitely a Black Swan event. He also said the worst may just be around the corner. In his words:
The U.S. is going to have $5 trillion to $6 trillion to borrow in the next 10 years. It’s going to be competing with European governments and corporates. One day, you’re going to have a bad auction. And that day will be the start of something new.
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