Tags: Cox | black swan | risk | markets

CNBC: 3 Potential Black Swans for Financial Markets

Friday, 05 Apr 2013 08:16 AM

By Dan Weil

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There are three possible black swans, or unexpected events of large magnitude and consequence, that could knock out surging financial markets, according to CNBC’s Jeff Cox.

The phrase black swan was popularized best-selling author Nassim Taleb in his book “The Black Swan: The Impact of the Highly Improbable.”

The first black swan is risk taking, Cox says. “Too much risk is what took down the market in 2008, and too much risk could do so again.”

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Much of the risk has come in terms of investors seeking yield in a near-zero interest rate environment. “Nowhere has this been more apparent than in the bond market, where companies issued a record $154.5 billion in junk bond debt during the first quarter,” he writes.

Second is the risk of a housing bubble. The industry has enjoyed a nice rebound in recent months

But stories are emerging that the Obama administration is pushing banks to grant mortgages to risky borrowers. This could spell trouble, Cox says.

“This is exactly the kind of thing that got the housing market in trouble to begin with, and a repeat performance is almost certain to end in disaster if debt loads become onerous and private investors suddenly get a taste again for mortgage-based products,” he explains.

Third is the risk that economic growth doesn’t meet heightened expectations. “Recent economic data … have suggested a slowdown in activity as we approach” the second quarter, Nomura Securities economists write in an analysis cited by Cox.

When it comes to stocks, some analysts remain bearish, despite the jump of major indices to record highs.

“Markets have blown past what fundamentals dictate they should be doing,” Barry Knapp, chief U.S. equity strategist at Barclays, tells The Wall Street Journal. He expects weak retail sales, consumer sentiment and earnings growth to weigh stocks down.

Knapp predicts the Standard & Poor’s 500 Index will end the year at 1,525, down 2 percent from Thursday’s close of 1,560.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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