Black Swans are large impact, hard to predict rare events beyond the realm of normal expectations based on experiential knowledge. Truly, there have only been two black swan event of that proportion in the past 26 years - and that was the stock market crash in 1987 and (at least for us Americans isolated by two oceans) was the collapse of World Trade Center in September 2001.

The Iraq war in 1990 was not a black swan - for wars we know about. Recessions too, are not unknown to us. We had a mild recession in 2001 and in 1989-1990. Not even bear markets are unknown to us, so not even the 51% SP500 correction of 2000-2002 could be considered a black swan event. At best, these have all been "Grey Swan" events since 1987 - to borrow a coined phrase.

Evolving Systemic Risks in Credit Markets
However, there have been some disruptive systemic risks to the global financial system since 1987, beginning with the Asian Contagion of 1997, as well as the Russian default and LTCM debacle in 1998. Systemic risks to the global financial system like we had in 1987 and the close calls we had in 1997 and 1998 scares border on being unquantifiable and unknowable events fraught with "Knightian Uncertainty."

By the by, the impact of the Asian contagion on the SP500 was 15% in 15 days, LTCM was 22.5% in 31 and 57 days (double bottom effect). By way of comparison, the SP500 has dropped 16.9% in 16 days from December 27th, and 21% in 69 days since October 11 2007 as of January 21 2008.

While the stock market declines TO DATE have been comparable to the 1997 and 1998 and a relief rally is highly probable this week, there is still no solution in sight for the intermediate outlook. There were quick fixes back then, but as of this moment, I know of no fiscal or monetary stimulus or tool that can "save the day" - other than to mandate a freezing of the credit rating downgrades like the gov't did with the ARM resets in December 2007.

No, after overnight plunge in the global equity markets on Sunday, the feeling I am left with at the end of the day is a bit like being stuck in Jean Paul Sartre's existential play "No Exit."

This is just something the investment community is going to have to stomach largely without the safety nets of a Federal Reserve or US Government because the problems lie in the shadow banking system - outside of the realm of the traditional banking system. The investment community at large will live to see another day, but they will have to face the music of forced asset sales and liquidations periodically as episodic credit rating downgrades and credit defaults are triggered throughout the year.

Shadow Banking System is Still Fraught with Knightian Uncertainty & Black Swan Potential

If all the US economy was doing right now was going through a recession-like economy - that would not be such a problem. But the matter is hardly as simple as that. The matter is severely complicated by credit crunches in the term markets, hoarding of money by banks, runs on the shadow banking system, 100's of subprime lenders blowing up, corporate credit rating downgrades and defaults - and particularly at risk in Q1 08 are the bond insurers ACA Capital, Ambac, MBIA.

These are not exactly household concepts or names familiar to most people. I did not know their names until last month. If you are not a full blown credit expert you might have some difficulty understanding why the SP500 index is off 5% overnight and down 20.8% from its October 11 2008 peak 14 weeks later. The plain fact of the matter is that many market participants are being taken by surprise. Even the credit experts themselves are having difficulty comprehending the magnitude of the potential systemic risks. "No one knows when the end may be in sight, including the raters,'' said Richard Larkin, a municipal bond analyst at JB Hanauer & Co.