grey swan events 2023

Grey Swan Events: Tail Risks in 2023

By:Christopher Vecchio - CFA

In his book, The Black Swan: The Impact of the Highly Improbable, Nassim Taleb defined the explored unpredictable financial events with extreme consequences – in other words, a “black swan.” Accordingly, by identifying potential risks to financial markets in 2023 ahead of time, these events can no longer be considered “black swans.” Rather, we call these tail risk events “grey swans”: low probability, known events that, were they to occur, would yield sweeping consequences for markets.

1. Social Unrest in China; Taiwan Invasion

One of the consequences stemming from China’s zero-COVID policy in 2022 was a spat of civil protests unseen since 1989. In response, over the ensuing weeks, the Chinese government announced a relaxation of lockdown restrictions and quarantine measures while similarly offering up fiscal support for a relatively lackluster economy. 

Given that the Chinese government’s main prerogative is to retain absolute control, civil unrest - and yielding to it - threatens its moorings to power. Should COVID-19 infections skyrocket in early-2023, prompting a return to lockdown restrictions and quarantine measures, it’s possible that another wave of protests emerges. 

In response, in order to turn the Chinese population’s focus away from domestic strife, the Chinese government could turn its attention back to Taiwan, which was the focal point of escalated geopolitical tensions for much of 2022. Ultimately, an invasion of Taiwan could be instigated in order to shore up domestic support within China.

What to Watch: FXI, KWEB, SMH, /6A, BABA, JD, LMT, RTX

2. Ukraine War Intensifies; Food & Energy Inflation Return

The onset of the Russian invasion of Ukraine produced a dramatic spike in commodity prices for two main reasons. First, one of the world’s prominent grain producers, Ukraine, was suddenly unable to meet supply expectations as sowing season was upended and distribution by rail and sea was disrupted. Second, Russia threatened to cut oil production should the West retaliate, which they ultimately did with aggressive sanctions, culminating in an oil price cap in late-2022.

While commodities like crude oil, natural gas, and wheat have since climbed down from multi-year - and in some cases, multi-decade - highs, the fact of the matter is that Russia’s invasion of Ukraine is still ongoing. Even though there has been some chatter lately about a new round of negotiations to end the war, perhaps by February 2023, the risk persists that the war enters a new phase of attrition. The result would be sustained volatility in energy and soft agricultural commodities throughout 2023.

What to Watch: /CL, /NG, /ZW, USO, UNG, CVX, XOM, OXY

3. Housing Crises Emerge in Western Economies

One of the knock-on effects - or perhaps, directly intended effects - of the Federal Reserve’s rate hike cycle has been a sharp rise in US Treasury yields, which have spilled over into mortgage rates. But it’s not just the Fed: the Bank of Canada, Bank of England, European Central Bank, among others, have all raised rates rapidly in recent months in order to combat inflation pressures, pushing up mortgage rates around the Western world. 

This development has reduced housing affordability in the United States, no doubt. But American homeowners typically have fixed-rate mortgages; less than 10% of US mortgages are variable-rate. It presents a different problem in countries like Australia, Canada, and the UK, where variable-rate mortgages are the norm, constituting a significant share of debt held by homeowners (Canada: approximately 35% of mortgages are variable-rate; in the UK, over 95% of mortgages are variable-rate). 

A continuation of rate hikes by central banks in 2023 could precipitate housing crises across Western economies, leading to a prolonged period of weak (if not negative) economic conditions.

What to Watch: XHB, TLT, /ZN, /ZB, /6A, /6B, /6C, LEN, TOL, PHM

4. US Dollar Hegemony Dwindles Thanks to China, Russia

The European Union’s and United States’ response to Russia’s invasion of Ukraine was to try to ringfence the Russian economy by cutting it off from global payments and transfers systems. This was done by limiting access to SWIFT - a messaging channel between financial institutions - and CHIPS - an international payments channel. There are over 11,000 financial institutions across 200 countries that use SWIFT, and 43 private institutions that use CHIPS. The bedrock of these systems is the fact that 40% of all international claims are settled in US Dollars and over 35% are settled in Euros.

Seeing how the EU and the US cut Russia off from large swaths of the global financial system with relative ease, it may be the case that developing countries on more neutral geopolitical terms seek to find alternative means of payments and transfers, lest they stay beholden to the whims of the West. In the very near-term, it’s unlikely that China (with CIPS) and Russia (with SFPS) can dislodge the US Dollar hegemony, but they will continue to lay the groundwork for an alternative means of commerce where they can. This may also mean central banks seek to diversify their foreign exchange reserves away from Euros and US Dollars over the coming years.

What to Watch: UUP, /6E, KWEB, FXI, ERUS, XLF, /GC, /SI

5. Arab Spring 2.0

After the Global Financial Crisis, central banks in Europe and North America flooded the financial system with cheap money in order to stabilize banking systems and promote economic growth. As the saying goes, “water finds its own level,” so too does excessive liquidity, reaching into every crevice of the global economy. Soon after the Global Financial Crisis, soaring soft agricultural commodities pushed up food inflation rates across the developing world, leading to a period of political and societal unrest in the Middle East and North Africa known as ‘The Arab Spring.’ 

2022 already produced a surge in food prices globally, with many currencies in emerging markets depreciating rapidly over the course of the year. Consistent with Grey Swan #2, “Ukraine War Intensifies; Food & Energy Inflation Return,” if 2023 sees similar escalated geopolitical tensions, then the risk of an Arab Spring 2.0 will only increase. As was the case in the early-2010s, this would mean even more volatility in commodity prices, coupled with the risk of destabilization across many economies in the developing world - Brazil, Egypt, Turkey, and South Africa, to name a few.

What to Watch: /CL, /ZW, EWZ, EEM, EZA, EGPT, TUR, /GC, /SI

— Written by Christopher Vecchio, CFA, Head of Futures & Forex

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.