Grey Swans: Preparing for the Unpredictable

When analyzing complex systems, we often try to glimpse into the future, hoping to discern patterns or predict outcomes. However, the human mind, accustomed to linear models and straightforward causality, struggles with the unpredictability inherent in these systems. Consider the example of an avalanche: you can’t know if the next snowflake will trigger the slide, but you do know there’s an abnormal accumulation of snow at the top of the mountain. The tension builds, the risks grow, and yet the exact moment of collapse remains elusive.

Markets are much like that snow-covered mountain—complex, interdependent, and teetering on the edge of instability. Right now, investors find themselves navigating an environment fraught with uncertainty and potential danger.

Recession or Not?

The macroeconomic data coming out of the United States is anything but reassuring. Growth has slowed, inflation remains stubbornly higher than the 2% target, and the labor market is sending mixed signals. The question of whether we’re heading into a recession is on everyone’s mind, but the data offers no clear answer. It’s a classic case of waiting for that proverbial snowflake to see if it tips the balance.

Geopolitical Tensions Unabated

Adding to the complexity, geopolitical tensions show no signs of easing. The West is entangled in two active war fronts—one in Eastern Europe, the other in the Middle East. These conflicts drag on with no clear path to resolution, keeping markets on edge and introducing layers of risk that are difficult to quantify. The situation is like watching storm clouds gather, knowing a downpour is inevitable but unsure of when it will hit.

Seasonality: Beware of September and October

Historically, September and October are notorious for being tough on the stock market. This seasonal trend looms large, especially in the current context where every piece of negative news seems magnified. Investors are bracing themselves, aware that these months could be the ones that push the market over the edge.

An Uncertain U.S. Election

The upcoming U.S. election adds another layer of unpredictability. With Harris now the official candidate, the race has tightened. The stakes are incredibly high, as the candidates’ policies could diverge significantly, impacting markets in profound ways. Investors are left guessing how different outcomes could reshape the economic landscape.

Governments Under Pressure

Governments worldwide are feeling the heat, aware that they’re losing the “mandate of heaven.” Trust in government is at an all-time low, with populations growing increasingly angry over declining living standards. In response, there’s a noticeable effort to control the narrative, including attempts at censoring social media platforms. The recent situation with Telegram’s founder and the EU’s letter to Elon Musk regarding Trump’s interview highlight how desperate governments have become to maintain control.

Signals in the markets?

Although U.S. stock indices are close to all time highs after the yen carry-trade scare, there are disturbing signals.

XLU, the utilities ETF, is outperforming the S&P500. This is typically a risk-off signal since utilities is the sector where investors who need to have exposure to the stock markets take refuge in.