Brown Swans Flocking

The term "Black Swan" event was coined by Nassim Taleb in his seminal book Fooled by Randomness. The book tells the story of a novice trader who puts on a trade in a bull market that makes big money. So he puts the same trade on again, but this time with leverage. Again it works. He keeps doubling down until one day the trade explodes and he loses everything. The end.

Taleb calls that a Black Swan event. I call that a Minsky Moment. Hyman Minsky had the opposite view of Taleb - he viewed financial disasters at the macro level to be inevitable, for a similar reason as Taleb's ill-fated trader: An entire society of gamblers doubles down on risk until they self-implode. However, both are right from a statistical point of view. Over a multi-year period of time, the odds of a financial crash on any given day are de minis. However, over that same multi-year period of time, the odds of a financial crash happening at some point are 100%. What is unpredictable is at the same time inevitable.

I consider the Black Swan terminology to be Wall Street's legal escape clause - as in, "no one saw it coming".

Therefore I came up with the term "Brown Swan event" as an alternative - which is a financial crash anyone could see coming, caused by too many overleveraged gamblers hitting the exits at the same time, with soiled underwear.

Case in point, "safe haven" metals trades last week:

That two day crash was a $7 trillion Brown Swan event. That's a lot of underwear.

"If 'safe' investments like gold and silver can crash in a single day, investors need to reconsider their portfolio hedges"

Maybe they should reconsider the term "hedge".

No surprise, Bank of America visited the smoking metals crater and came back with a sell signal on Friday, far too late. Their Wall Street consensus "run-it-hot" inflation trade for all of 2026 exploded all of January's gains in two days as we see in the chart above.

"Investor optimism has reached extreme levels, Bank of America strategists say, with their Bull & Bear Indicator rising to 9.4 from 9.2 — a threshold that continues to flash a sell signal for risk assets."

One of the reasons given for the extreme selloff in metals was due to Trump's appointment of Kevin Warsh to lead the Fed. What we've learned is that Warsh is NOT a fan of stock market bailouts using the Fed balance sheet aka. "Quantitative Easing". Therefore it IS extreme irony that Trump is swapping out Powell for someone who is far more hawkish regarding market bailouts. Needless to say with Warsh's appointment, even I may be overly optimistic for how all of this works out. I am certainly pushing back my bond buying plan until I know that someone in the White House has soiled underwear.

"Warsh has repeatedly and loudly blasted his old colleagues over the years for letting the bank’s assets balloon via so-called quantitative easing, prompting speculation in markets that he could move quickly to draw them down."

Which explains why Cryptos are also imploding, because that entire trade is predicated upon "Money printer go 'brrrrrrr'".

Not anymore.

Finally on the imploding inflation trade, I noticed that Consumer Staples were leading the market today. Which is the quintessential DEFLATION trade. AND the last rotation before the BIG crash in 2022:

Which gets us back to the AI trade.

The AI trade has already crashed once, but the consensus buy ratings on the most overbought stocks in the market never changed, all way down to the bottom. Hence we should not expect today's serially bullish analysts to change their minds now. They will ride it all the way back down to the bottom where they will downgrade the bankrupt AI sector to sell when they figure out that PornGPT has insufficient ROI for $5 trillion in capex.

Because, who knew?

Unlike the last peak and crash, the AI trade is now imploding the non-AI Tech sector for the first time. Which includes all non-AI related hardware stocks: Servers, PCs, video game consoles, smartphones - imploded by sky-rocketing memory chip prices.

And AI is also collapsing cloud and software stocks that are now deemed obsolete.

In summary, we have a "K-shaped" Tech sector above AND a K-shaped economy below.

The K-Shaped economy consists of an imploding standard of living for the majority and an imploding asset bubble for the "extremely optimistic" gambler class who are rushing into a Brown Swan event.