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The Austrians and the Swan: Birds of a Different Feather
(May 2012)
Mark Spitznagel, Chief Investment Officer
What is a black swan event, or tail event, in the stock market?
- It depends on who’s asking.
- To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well over 40%)—like pretty much all that came before in the past century—will certainly not be a Black Swan, nor even a tail event.
- Nonetheless, the black swan notion is paramount—in perception: Market participants’ failure to expect a perfectly expected event—that is, they price in only Anglo swans despite the Viennese bird lurking conspicuously in the weeds—much like what is happening today, brings tremendous opportunity.
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The Dao of Corporate Finance, Q Ratios, and Stock Market Crashes (June 2011)
Mark Spitznagel, Chief Investment Officer
This white paper provides clear and rigorous evidence of a direct relationship between overvaluation and subsequent extreme losses in the aggregate stock market.
Of equal importance is the use of the Q ratio as the most robust aggregate overvaluation metric, which isolates the key drivers of valuation.
At current valuations (Q ≈ 1.04)—and if this 110-year relationship continues—there is an expected (median) drawdown of 20%, and a 20% chance of a larger than 40% correction in the S&P500 within the next few years; these probabilities continually reset as valuations remain elevated, making an eventual deep drawdown from current levels highly likely.
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