Defining “Risk-Off” Events

What we’re keeping an eye on going into the weekend… OCTOBER 04, 2024 UPDATE A GREY SWAN PUBLICATION Defining “Risk Off” Events Risk comes from not knowing what you’re doing.” –Warren Buffett --------------------------------------------------------------- [Turn Your Images On] New technologies have always threatened some jobs, but have created vastly better ones in the process. [Exciting News: You’re now seeing Grey Swan Investment Fraternity branding for this email, representing our new mission. There's nothing you need to do on your end to continue receiving your emails. Our "new look" simply better represents our goal of delivering you deeper access to the Grey Swan intelligence community — and warn you of potential low-probability, but high-impact events. Watch for the Grey Swan website soon!] Reader, [Turn Your Images On] Addison Wiggin, Grey Swan October 5, 2024 – The stock market largely sat around in wait-and-see mode this week. What was the market waiting for? Today’s jobs report. Is it an important report? Not really. We get this data every month. But it is the first report since the Federal Reserve made their jumbo 50-point basis cut to kick off a rate-cut cycle. The central bank specifically mentioned shifting from fighting inflation to protecting the job market. On the surface, the job market looks strong. There was a massive beat, with 254,000 jobs added. Unemployment even dropped from 4.2% to 4.1%. Good news? Sure. But it’s also bad news. After all, if the job market is so strong, the Fed didn’t need to cut by 50 basis points. Perhaps the central bank is looking at data that suggests a weaker economy than the current headlines suggest. Time will tell on that front. But there was a more significant factor at play this week. As of Friday morning, oil prices were up 7% on the week. While oil can be more volatile than stocks on a daily baiss, it’s a big move in one direction. The reason for oil’s move? Rumblings – or more succinctly large explosive projectiles being hurled in various directions – in the Middle East. On Tuesday, Iran lobbed about 180 missiles towards Israel, some of which actually got close. On Thursday, President Biden mentioned that he was discussing the possibility of Israel striking at Iran’s oil infrastructure in response. While we don’t see oil jumping to $100 per barrel overnight, the commodity’s 5% rally on Thursday could have more to run as these events unfold. Meanwhile, markets rallied on the strong jobs number, but have had some choppy trading into the afternoon. Whatever markets do regarding today's jobs report, one possibility is that stocks sink lower in the final hours of trading thanks to these geopolitical rumblings. If that’s the case, it’ll be what’s known as “risk-off” behavior. Simply put, risk-off means that investors re-think how bullish they are about the economy. This behavior can occur for a number of reasons. But the potential for a Middle East flare-up is certainly a good short-term reason for a weekend selloff. Our portfolio director Andrew Packer states, “When investors don’t know if there will be some uncertainty over the weekend, they may want to end trading on Friday with higher levels of cash than usual. They can always get back into the market on Monday, provided that their fears don’t materialize. We saw that with Iran and Israel’s last back-and-forth exchanges in the spring.” So far, none of these moves point to a full-blown Grey Swan event. But we don’t know what the exact catalyst will be – only that events like these increase the possibility of a market-breaking catalyst. And apologies to Warren Buffett, but risk isn’t just “not knowing what you’re doing.” You also have to account for the actions of billions of other human beings around the world too. And most of them seem to underappreciate how the world is inching towards a larger global conflict right now. In the meantime, looking further at Iran and Israel’s escalating conflict, we’re sharing some thoughts from Grey Swan Investment Fraternity contributor John Robb. John shared some thoughts with us in our September Grey Swan Bulletin newsletter for paid subscribers. Specifically, John looked at Israel’s attack on Hezbollah leadership using explosive-packed pagers, the event that’s kicking off this bigger spat between Israel and Iran. Enjoy ~~ Addison CONTINUED BELOW... --------------------------------------------------------------- [Shocker: Could Executive Order Guarantee a Kamala Win?]( [Turn On Your Images.]( The research firm that predicted President Trump’s win in 2016 and Biden’s recent drop out exposes…  Just released [this shocking expose on Executive Order #14019…](  Explaining how it could help Kamala rig the election, beat Trump in November and begin the final destruction of America.  [Click here to see the details and learn how to prepare.]( --------------------------------------------------------------- CONTINUED... Overheard at the Grey Swan Speakeasy: Israel’s Attack on Hezbollah Conversation with Addison Wiggin and John Robb, of [Global Guerillas]( Addison Wiggin: Can you comment on the charger bomb campaign Israel v. Hezbollah? As a tactic, it seems rather ingenious -- a kinetic way to go after the communications network. It's likely short-lived for now, but forever a weapon in the arsenal like suicide bombers and kamikaze attacks. Seems like the defense would require serious security of the devices from production to deployment.  One thing I’m trying to wrap my head around is... in a network war, what are the objectives? Grey Swan contributor Michael Snyder has been writing on and off about the coming “big war” and, in an old-school way, depicts it with maps and territories. But other than the holy land and control of resources, maps only show us lines in the desert. A hot network war seems like something else… existential? What are the geopolitical implications? Are there any parallels in history? John Robb: Sure, let's break it down.  Israel was able to get access to Hezbollah's supply chain (Taiwan -> Iran -> Lebanon) for encrypted communications equipment (although from the coverage, it appears that a civilian supply chain was sabotaged). Rather than use access to these devices as a way to gather information on Hezbollah operations, they used this physical access to booby-trapped the devices. They then called the devices to detonate them (likely “if this number calls you, boom)”, creating a large number of small explosions, killing a few and injuring many (including civilians). In terms of motivations for this attack, I suspect the Israelis did it more for domestic purposes than for military reasons. It gave them a 'win' and a helpful distraction from the Gaza quagmire. Now, let's frame it. Within the military framework, a sophisticated supply chain attack like this is a type of systems disruption. It disrupts Hezbollah's psychology by injecting uncertainty into their decision-making process. However, since no large-scale operation is underway to capitalize on it, the psychological impact of this uncertainty and the attritive impact of a small number of deaths/injuries of low to mid-level personnel will be negligible. Typically, nation-states don't engage in systems disruption like this due to the asymmetry of effects. Nation-states are far more vulnerable to systems disruption than guerrilla groups or militias due to the leverage/scale of the systems they rely upon — i.e., the disruption or booby-trapping of civilian infrastructure in a nation-state would impact millions. They also avoid this type of operation because of the moral damage it does. Nation-states typically use their unwillingness to disrupt systems as a moral shield against similar attacks -- i.e., 'we are more legitimate than this guerrilla group because we aren't willing to do this.' That shield and the advantage it provides are now gone. With this in mind, it's possible that this operation unlocked a new, asymmetric, fat-tailed risk for Israel (widespread systems disruption). For example, if Hezbollah and others treat this as a precedent/green light for the disruption or booby-trapping of civilian supply chains that are tangentially connected to military personnel (which is almost everything and everyone in Israel), this could backfire as disruptive retaliatory attacks go beyond electronics into consumer products, food, and water. From  a strategic perspective, this is just a part of the global systemic conflict between the U.S. and China. China sees any escalation of this conflict as a way to tie up U.S. forces in southwest Asia (there aren't any aircraft carriers in the Pacific anymore due to this conflict) on the cheap (some drone and consumer electronics technology). PS: This event is also a preview of the electronic sabotage and systems disruption that would happen if the conflict between the US and China gets hot. ~~ John Robb, of [Global Guerillas]( So it goes, Addison Wiggin, Grey Swan P.S. We’ll have more thoughts from John as events unfold in the Middle East and elsewhere. This is one Grey Swan issue that isn’t going away anytime soon. If nothing big happens in the Middle East over the weekend, or between Russia and Ukraine, or in the Strait of Taiwan, look for traders to do the opposite on Monday and go “risk-on.” Or find a new “risk-off” event to think about. Meanwhile, one Grey Swan event appears to be averted (at least until mid-January). America’s port workers have agreed to get back to work. The 62% raises they’ll see over the next few years, and promises to avoid automation technologies, may have tipped the scale. Not a bad return on investment for a three day strike! Our astute readers were quick to point out some of the forces at work with the port strike. Robert from Houston writes: Mr Wiggin, The Longshoreman's strike is a wonderful opportunity for the Port Operators. They are free of their prior contract. Some of those operators in less-labor captured jurisdictions (Corpus, Houston, Mobile) should have prepared automation projects and replacement workers. Full speed ahead. Do not try this in places like Bayonne unless you want excessive violence. - Robert And regarding our early-week writeup on the latest attempt to push for one-world government, Kevin writes in: I do not think a one world government is achievable. However, we must all get along. My suggestion is to create a democratic template that the United States will admit additional states to our Union if they submit to our Constitution. Our Allies must comply with the principals that the United States will stand behind in any event. It is a matter of choice. – Kevin That’s a brilliant thought. And… next to impossible to pull off is my answer. Rather, my initial reaction was “Ha! Fat chance!” Karl Marx said in his Manuscripts of 1844 he believed the US Constitution and Montesuieu’s division of state powers was brilliant and delivered “political” emancipation for the people. These collective efforts to create a supra-international-global-world government are anathema to political emancipation. A one-world government run under the guidelines of the U.S. Constitution would be much more favorable to individual rights than in most parts of the world today. However, we would suggest that we first get the existing 50 states on board with following both its letter and its spirit. And that the courts significantly rein in the “necessary and proper” clause, which has been used to jam through nearly federal power grab for the past century. For instance, in a 1942 Supreme Court case, Wickard V. Filburn, the court even upheld the government’s power to prosecute a farmer for growing wheat to feed his farm animals in excess of production limits. Today’s insanity is clearly nothing new. Thanks to all for the feedback so far. We’re thrilled with the community that’s being built here, and appreciate that you’re a part of it. You’re always free to send your thoughts to: addison@greyswanfraternity.com How did we get here? Bill Bonner and I penned a few alternate takes on the financial, economic, and political history of the United States from [Demise of the Dollar]( through [Financial Reckoning Day]( and on to [Empire of Debt]( — all three books are now available in their third post-pandemic editions. You might enjoy one, or all three. 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