Nassim Nicholas Taleb coined the term Black Swan, which are rare outlier events that have an extreme impact. While black swans are in themselves unpredictable, they typically arrive during recessions or economic slowdowns. Why is this?

It's all about the cycle. During periods of high liquidity, money flows into speculative assets. When money is cheap and plentiful, virtually all asset classes rise. However, when liquidity is removed from the financial system, that is when bubbles burst and structural weaknesses are exposed. For example, Bernie Madoff's Ponzi scheme may never have been discovered if not for the redemption requests from his clients that needed cash because of the fallout from the Great Financial Crisis.

In recent weeks, cracks have been forming on the surface where we can see them. Across the pond, UK interest rates spiked after Britain's proposed “mini” budget revealed potential tax cuts during a period of high inflation. The sharp increase in bond rates wreaked havoc on British corporate pension funds revealing that some funds were leveraged as much as seven times! The dramatic move in rates suddenly brought on the risk of margin calls and the forced selling of assets. The Bank of England had to step in by buying billions of bonds while it is also hiking interest rates. This is like battling a fire by using water and gasoline at the same time.

Europe facing historic levels of inflation
While Americans are dealing with inflation that hasn't been seen since the 1970s, Europe is facing an even more difficult situation because of the Russian-Ukraine war. Europe is reliant on Russia for natural gas and other commodities, and this is causing historic inflation.

European PPI (producer price index) recently hit 43.3 percent, the highest ever on record. Energy prices are up 117 percent. On the consumer side, CPI is up over 10 percent. With a cold winter ahead, household budgets are going to be greatly affected throughout Europe.
These factors are negatively impacting corporate profit margins and consumer spending. For the last three months, European retail sales have fallen year-over-year.  The recession will likely be deeper in Europe than in the US unless there is a peaceful resolution to the war, which is unlikely at this point.

How does this affect US markets and our investments? Many of our leading technology firms like Google, Microsoft, Facebook, and Apple derive a substantial portion of revenues from Europe. This will be a stiff headwind for earnings in the quarters ahead.

The global economy is facing an economic slowdown in the face of high inflation. In past cycles, markets could rely on central banks to provide liquidity to fight off a bear market; however, this time their hands are tied as they hike rates in a desperate attempt to bring down inflation. Despite the pullback in stocks, risks are still high.

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