Was The Recent Downturn In The Stock Markets A Black Swan Event?

GSPCWhen the stock market blows through its lower Bollinger Band you have to wonder whether we have reached a point where statistics will be of limited use in predicting the future. As you can see from the chart blowing through the lower Bollinger Band is a pretty rare event. I find it amazing that this “unprecedented and unexpected” stock market drop was a reaction to economic problems in China. Since many pundits have been saying for several years that the China’s growth was slowing down, it is hard to say that the recent Chinese devaluation was unexpected event for an economy so dependent of exports. So what made this devaluation different than previous devaluations? Maybe this Yahoo Finance article gives us some insight into the confidence of our financial leaders to get us out of the next financial panic and why the Federal Reserve is so committed to raising interest rates in September. Can the Federal Reserve restore public trust with just one interest rate hike?

A recent working paper by the vice president of the St. Louis Federal Reserve Bank finds that after six years of quantitative easing that swelled the Fed’s balance sheet to $4.5 trillion, “casual evidence suggests that QE has been ineffective in increasing inflation” and only seems to have boosted stock prices.

Complaints once in the realm of conspiracy theorists wearing tin foil hats are now being embraced by the Wall Street establishment. In a note to clients, Deutsche Bank analysts warned that “the fragility of this artificially manipulated financial system was exposed” and that “the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities.”