“Gray swan is a term used to describe a potentially very significant event that is considered unlikely to happen but still possible. Because there is a slight chance the event will occur it should be anticipated, particularly as it could shake up the world, economy and stock market” - Investopedia

It appears that someone threw bread crumbs laced with hallucinogens into our gray swan’s pond. Remember that a gray swan event differs from a black swan event because there are evident signs that an event may happen and preparations (like hedging) can be initiated. A black swan is totally unforeseen (like an asteroid hitting earth) and difficult to prepare for. But if a gray swan is fed psychedelics, then – oh boy!

The coronavirus started becoming an issue over three months ago in China, and warning flags were raised: A gray swan event beginning to blossom for sure. Markets began to notice the virus, the media really started covering the virus, rumors and social media have piled on and markets have declined – okay, tanked. What now?

So, once again, there can be no bias. No political bias, no market position bias, no historical bias – just a completely objective thought on a gray swan event.

Let’s say you’re a billion dollar fund manager, a financial advisor, a passive investor, a proprietary firm trader, or maybe a global central banker.  Are you looking ahead? What happens when this event comes to an end?

Certainly there will be a big global hit to global economies and most likely a recession (or two or three). Then what? Will growth pop back up quickly and global GDP spike? If that’s the case, then all the recently released stimulus will need to scaled back and certainly these zero interest rates will turn up. Will rates spike higher? Will pent up demand trigger an inflation spike? How will central banks respond?

What if all this uncertainty drags on with zero growth and central banks throwing more stimulus at comatose economies or if  interest rates to go deeper into negative territory?

This gray swan article is meant to trigger very objective thinking. Let’s think about how a portfolio should be structured which, of course, depends on individual thoughts. As in any structure there needs to be hedging. Gold? Absolutely! Digital assets (bitcoin, ethereum)? Get some exposure for sure. Maybe a reverse long-term treasury ETF? Hmmm, interesting.

So, for now, watch for more gray swan events. They are visible if you pay attention. Now, I am going to spend some time with my gray feathered friend to enjoy some magic mushrooms.

Bill Taylor is Managing Director of Entoro Wealth and architect of the Gray Swan Portfolio.