Attempts to Suppress Volatility Could Lead to a Crash in Existing Economic and Political Systems. Financial analyst and author Nassim Taleb demonstrated that suppressing market volatility in the short-run leads to much more violent bursts of dislocation and chaos in the long run. Taleb learned many of his ideas from mathematician Benoit Mandelbrot (who discovered fractals). As Scientific American noted in 2008: One of those long-time market watchers is fractal pioneer Benoit Mandelbrot. In 1999, Scientific American published an article by Mandelbrot that showed how fractal geometry can model market volatility, while revealing the intrinsic deficiencies of a cornerstone of finance called modern portfolio theory (for which there has been awarded more than one Nobel Prize in Economics).
Mandelbrot, 83, contends that portfolio theory, which tries to maximize return for a given level of risk, treats extreme events (like, say, yesterday’s market shockers) with “benign neglect: it regards large market shifts as too unlikely to matter or as impossible to take into account.” The Black Swan of Cairo. Why is surprise the permanent condition of the U.S. political and economic elite? In 2007-8, when the global financial system imploded, the cry that no one could have seen this coming was heard everywhere, despite the existence of numerous analyses showing that a crisis was unavoidable.
It is no surprise that one hears precisely the same response today regarding the current turmoil in the Middle East. The critical issue in both cases is the artificial suppression of volatility -- the ups and downs of life -- in the name of stability. It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability "tail risks" to disappear from policymakers' fields of observation. Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks.
To continue reading, please log in. Don't have an account? Great Moderation or Great Delusion. A recent (December 2011) paper published by CEPR offers a very interesting analysis of the macroeconomic risks propagation in the current crisis. The paper, titled Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? (CEPR DP 8700) by Tobias Broer and Afroditi Kero looks at the evidence on whether the period of Great Moderation in macroeconomic volatility during the period from the mid-1980s (the decline in macroeconomic volatility that is unprecedented in modern history) had an associated impact on the rise of asset prices that accompanied this period, setting the stage for the ongoing crash.
In recent literature, this rise in asset prices, and the crash that followed, have both been attributed to "overconfidence in a benign macroeconomic environment of low volatility" or to excessively optimistic expectations of investors that the lengthy period of macroeconomic stability and upward trending is the 'new normal'.
Repo market... Dot.com bubble. 1997 asian crisis. An apocalyptic end to world’s biggest bubble. By Paul B. Farrell, MarketWatch SAN LUIS OBISPO, Calif. (MarketWatch) — The theme: Repent. Haunting images of fanatical serial killers warning, “The End is Near, Repent!” Yes, the Four Horsemen, again. Are things worse than we think? Evan Newmark talks to Euro Pacific Capital president Peter Schiff, who fears as bad as we think the global economy is, things might, in reality, be even worse. How else to accept today’s bizarre plot line: A decade ago Republican George W. Yes, drown. They’ve become a vengeful cult that will never back the president on anything, even their own job-growth policies. America’s an addict, out-of-control, doesn’t care who gets hurts Yes folks, I am mad as hell.
Today that toxic mind-set is a metaphor visible everywhere, in images like Dexter’s Four Horsemen, visions of America descending into a self-created Inferno. My America is out of control, babbling nonsense, acting like a junkie, addict, very bad alcoholic. The Four Horsemen kept racing through my mind. Why Identifying a Bubble Is So Much Trouble: John H. Cochrane. We seem to be surrounded by “bubbles” -- tech stocks, real estate, and now maybe sovereign debt. You might expect that any textbook would have a precise definition of this phenomenon; some set of characteristics that distinguish sensible high prices in good times from prices that are “too high” or in a “bubble.” Alas, “bubbles” seem to be in the eye of the beholder. Does that mean it’s all just empty talk? No, and there is solid academic research that helps us to think about what “bubbles” might mean, and how both policy makers and investors might think about them.
Here are the central facts: High valuations are, on average, followed by many years of poor returns, and vice versa. This fact holds across markets: -- High stock price/dividend, price/earnings, or market/book ratios are on average followed by years of poor returns, not years of higher dividend and earnings growth, or permanently higher prices, and vice versa for low prices. No one substantially disputes these facts.
Randy Wray: The Biggest Bubble of All Time – Commodities Market Speculation. By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor Sorry, this is a day late (but hopefully not a dollar short). Back in fall of 2008 I wrote a piece examining what was then the biggest bubble in human history: Say what? You thought that was tulip bulb mania? Or, maybe the NASDAQ hi-tech hysteria? No, folks, those were child’s play. “According to an analysis by market strategist Frank Veneroso, over the course of the 20th century, there were only 13 instances in which the price of a single commodity rose by 500 percent or more.
Now here’s the amazing thing about that bubble. The pension funds panicked, realizing that their members would hold them responsible for exploding prices of gasoline at the pump. But then the crisis wiped out real estate markets and the economy. And boy, oh boy, what a boom. But it did. The commodities crash - macrobusiness.com.au | macrobusiness.com.au.
No doubt you will have noted the collapse in commodity prices that accelerated on Friday night, even as equity markets remained flat. Just in case you are unaware, here are a couple of quick charts. First the CRB: And its more volatile cousin, the CCI: The crash is across the commodity spectrum but is especially severe in metals (as a quick aside, I’d say Australia’s terms of trade have definitely peaked for this cycle). A number of reasons have been put forward for the rout by any number of analysts. The most popular is that nice easy sound bite, easing global growth means the less demand and greater surplus of supply. This quote from Bloomberg is typical: “We are seeing commodity prices correcting, so they are more compatible with the global economy,” said Christin Tuxen, a senior analyst with Danske Bank A/S in Copenhagen.
And no doubt this is true to an extent. In my view, therefore, it’s not enough to say that diminishing growth prospects triggered the rout. Changing behavior of crude oil futures prices. I’ve just finished a new research paper with my former student (and now University of Chicago Professor) Cynthia Wu. In our new paper, we study how increased purchases of crude oil futures contracts by financial investors may have affected the prices on those contracts.
A crude oil futures contract is an agreement between two parties to purchase oil at a future date at a price agreed upon today. For example, on Friday the November contract closed at a price of $88.18, meaning that if both parties were to hold on to the contract until expiry (which for this contract happens to be October 21), the seller would be obligated to deliver 1,000 barrels of crude oil to the buyer some time in November at a location in Cushing, Oklahoma at a price of $88.18 per barrel. Most people who buy or sell these contracts don’t actually hold them to expiry, but sell their positions to somebody else between now and then. But who would take the other side of the contract? Web IPO Boom: Is This Time Really Different? | Epicenter The trading floor of the New York Stock Exchange just after the crash of 1929. /Public domain They’re the four words that should strike fear in all investors’ hearts and send them fleeing to the nearest bomb shelter: “This time is different.”
Yet that is precisely the argument being made by some prominent experts to describe the coming wave of initial public offerings by internet companies. In the next two years, Facebook, Zynga, Groupon and LinkedIn are all likely to go public. Web publisher Demand Media is set to kick off the party later this month. The impending public offerings, and the eye-popping valuations being discussed in conjunction with them, have given some observers flashbacks to the dot-com bubble of 1999-2000 and the subsequent market crash that wiped out scores of companies and billions of dollars in shareholder equity, and plunged the United States into a recession. Ten years later, the circumstances seem somewhat different. Let’s take a look at Facebook. Robert Brenner · Towards the Precipice: The Continuing Collapse of the US Economy · LRB 6 February 2003. At 6 a.m. on 12 June 2002, four FBI agents barged into the SoHo loft of Samuel Waksal, the former CEO of the biotech company ImClone Systems Inc, and led him away in handcuffs: he was charged with insider trading.
His father and daughter had dumped nearly 175,000 ImClone shares only days before the Food and Drug Administration announced that it had rejected Erbitux, the compay’s cancer drug, leading to a steep price fall. (Waksal himself had netted $57 million on an ImClone share deal the previous September, and had made an additional $72 million in 2001 from his stock options.) On 25 July, John Rigas, the former head of Adelphia Communications, was arrested, along with his two sons, on corporate crime charges. When corporate scandals first hit the headlines early in 2002, the US Treasury Secretary Paul O’Neill attributed them to the immorality of a ‘small number’ of miscreants. Apparently he’d been misinformed. But the economy could defy gravity for only so long.
Why the Clean Tech Boom Went Bust | Magazine. Wind Power: Plummeting natural gas prices now make this option comparatively expensive.Photo: Dan Forbes John Doerr was crying. The billionaire venture capitalist had come to the end of his now-famous March 8, 2007, TED talk on climate change and renewable energy, and his emotions were getting the better of him. Doerr had begun by describing how his teenage daughter told him that it was up to his generation to fix global warming, since they had caused it. After detailing how the public and private sectors had so far failed at this, Doerr, who made his fortune investing early in companies that became some of Silicon Valley’s biggest names—Netscape, Amazon.com, and Google, among others—exhorted the audience and his peers (largely one and the same) to band together and transform the nation’s energy supply.
“I really, really hope we multiply all of our energy, all of our talent, and all of our influence to solve this problem,” he said, falling silent as he fought back tears. Financial Crisis' Crise et recrises. Fin du capitalisme, crises et alternatives. Vous avez dit crise ? La solution par défaut!