Black swan events are often rare in the financial market. The most recent events that can be put in this category are the Global Financial Crisis (GFC) in 2008, the COVID-19 pandemic, and Russia’s invasion of Ukraine. These events tend to have major implications in the financial market.
Recent black swan eventsFor example, the GFC led to the start of quantitative easing (QE) while Covid accelerated it. The Fed’s balance sheet jumped from less than $3 trillion in 2008 to almost $9 trillion during the pandemic.
Russia’s invasion of Ukraine, on the other hand, has changed how the world operates. For one, the US has become the biggest player in the natural gas industry while Europe has moved on from the cheap Russian gas.
Black swan events are also highly difficult to predict. Not many people predicted the GFC and Russia’s invasion of Ukraine. The COVID-19 pandemic and its implications were also hard to predict.
What will be the next black swan event?However, I believe that the next major black swan event is easy to predict. I suspect that this event will happen when Moody’s finally downgrades America’s debt. By doing that, it will join S&P Global, which slashed it in 2011, and Fitch, which slashed in 2023.
The main reason is that it is difficult to justify the US having a Triple-A credit rating. For one, while the US is the biggest economy in the world, its total debt stands at over $34 trillion. Last week, I wrote that the debt is estimated to get to get to over $54 billion in the next decade.
This will be a black swan event for a simple reason. In the past decades, the US has handled black swan events through monetary and fiscal policy tools. It provided a $700 billion bailout to banks during the Global Financial Crisis.
🚨 United States now borrowing over $85,000 EVERY SECOND and it's going to continue to GO UP.
🚨 "It's the DEATH SPIRAL, and we are so close…"
🤡 "Congress has decided they don't want to be in charge." @RepDavid #ClownShow #ampFW pic.twitter.com/cf5bFysRsF
The US lowered interest rates and spent trillions to deal with the Covid-19 pandemic. Therefore, losing its last major Triple-A rating means that the cost of borrowing will likely remain at an elevated level for a while.
This will happen at a time when the cost of servicing the country’s debt is expected to soar to over $1 trillion. Unfortunately, there is no easy way out from this crisis since Democrats and Republicans are still not ready to take tough decisions.
When you are highly leveraged, the simplest way to get out is to increase revenues (in this case by hiking some taxes), cut spending, and reduce spending. These three priorities will not happen. For example, the government is now debating another giant $100 billion foreign aid deal.
Therefore, this black swan event could be worse than the previous ones because the US will not have the tools it needs to handle it.
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