I could not agree more with the array of Black Swans described by Prof. Roubini.



To add to the concern of this analysis, just to point out that the negative effect from the sudden occurrence of any of these events will be, in my view, extremely compounded by the Achilles' heel of current markets: the false sense of liquidity of all major securities market.



Liquidity, the ability to buy and sell large amounts of a security without causing a major or disproportionate impact in the traded market price, meets its proof of the pudding in a "sudden seller market", especially when driven by a Black Swan. The main driver of the magnitude of the negative price impact is the market's ability to produce counterparts that buy for the required volume offered by the sellers.



Before 2008, these counterpart buyers were the investment banks, through their proprietary (driven by their own orders) & market-making (driven by their institutional investor clients' orders) trading books. After the crisis and subsequent re-regulation, it is estimated that up to 80% of the available capacity for this activity has disappeared. However, not substantial alternative has replaced so far this capacity vacuum. [Not arguing here against the re-regulation per se, just stating the facts for my argument below]



It is important not to forget that to mark a price in the market you just need 1 buyer and 1 seller. If liquidity drastically disappears in a sudden sellers market, then the price fall will be large. And, at new low price, the mark-to-market of the portfolios holding these securities will oblige more investors to sell, feeding a negative pricing spiral.

At that point, how far the price will go before stabilizing is anyone guess. Of course, in less liquid markets, such as High Yield or Emerging markets, the impact would be even more drastic.



Just to get a feeling of how jittery the situation is: last week small bond selling sparked by the resignation of B.Gross at PIMCO (something quite far from being a Black Swan), brought long term yields up by 16 bps in 5 days, quite a sharp move for the theoretical liquidity of US bond markets.



Thus, it is reasonable to estimate that an event like the situation experienced in 2008, nowadays, would have a much worse impact in securities prices, which, let's not forget, continue to be at historic highs across equities & bonds. And this time, there is not much Public Sector or Central Bank capacity to intervene, as Debt/GDP ratios and CB Balance-sheets are in record high respectively.



If we add Murphy's law to the cocktail above, it would not be difficult to empathize with Prof. Roubini's pessimism.