The term "black swan" was coined by a New York University Professor of Engineering named Nassim Nicholas Taleb in his book, The Black Swan: The Impact of the Highly Improbable published in 2010. His focus was on the great mega-disasters that have occurred infrequently down through history, so infrequently that people dismiss the likelihood of their occurrence and are therefore inevitably unprepared when they happen
But the very nature of "black swans" as defined by Taleb, at least in terms of their rarity, seems at odds with what is going on now -- a veritable flock of black swans: the housing collapse that continues to weigh on our economy; the fiscal crisis that has Washington tied up in knots; the terrible earthquake and tsunami in Japan, followed by a meltdown of a nuclear power plant followed by still another quake, that will slow world growth; the wave of unrest sweeping the Mideast that is causing skyrocketing energy prices -- any one of these things by itself should be enough to send shock waves through world financial markets, or so it would seem.
But the flock of black swans seems no more than a passing breeze to Wall Street which continues on its merry climb, seemingly oblivious to the world around it. It is as if the traders in corporate bonds and securities are living in another dimension, independent of planet Earth, and thus have no concern about the travails besetting the human species.
One would like to think this is because the financial world is mature and levelheaded, knowing from experience that all of these black fowl, as terrible as they are, will pass away, and world economies will continue to grow because of sound fundamentals. Strong corporate earnings support this interpretation of what is happening.
Unfortunately, the market has shifted from a primary focus on fundamentals and is increasingly driven by hedge funds, black pools of money and program fund managers who are more interested in speculation than sound investment. The fundamental cause of this development is Ben Bernanke's QE2 initiative, in which the Federal Reserve is pumping vast amounts of money into the system to keep interest rates near zero. It is clear that zero interest rates encourage more speculation in energy, gold and other commodities, speculation that can drive the market ahead of fundamentals.
In short, the extremely easy monetary policy from the Federal Reserve is encouraging excessive speculation in a broad range of commodities, encouraging a rise in inflationary expectations and setting the market up for a correction when the easy money disappears.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.