Jan

29

The parasite T. Gondii lives in rats but must get transmitted to cats to complete its life cycle. It does this by changing the rat brain so that it seeks out cats. When the cat eats the rat, the parasite gets transmitted through droppings to other mice and humans. The incidence of schizophenia in humans is about 25% higher in those 7% of the human population that have contracted the parasite than the rest of the population.

This parasite and other parasites play a large role in determining the behavior of their hosts. For example the fluke d. dendriticum changes the behavior of ants so that instead of spending time in its nest, it climbs on top of a blade of grass, so that it will eaten by a grazing aminmal. Other flukes cause fish to jump up so that predators will eat them. And hairworms cause grasshopers to drown themelves, transmitting the worms through water as they die.

Parasites attack the body without the host knowing it, and the virulence of their attack is related to their method of transmission. Factors that determine their activity include their ability to reproduce, the mobility of their host, the costs of dying and the costs of sickness. In general, if the probability of transmission is high as it is in crowded conditions, for example in foxholes or planes, then then severity of the illness increases.  Where the parasite needs a mobile host who sneezes, or has sex with induced increased frequency then the parasite becomes relatively mild in its impact, especially during the first stage of its impact, so that it has more time to reproduce and survive.

All this and much more is contained in the layman's book "Survival of the sickest" by Sharon Moalem. The basic thesis is that many diseases that we now have once served to help us survive when a short term solution like preventing freezing during an ice age or gaining energy during a famine were imperative. They served a function then, but now cause diseases like diabetes, Alzheimer, and cancer.

In looking at the recent disclosure of an 8 billion loss from a hidden agent in its Delta One unit, I found that the insights I gained from the study of infectious agents and their transmission method were very helpful. The agent was hidden in a hard to find part of the hosts structure, it stayed invisible for several years while it was acting with little impact, it acted mainly during the evenings, in anonymity, without alerting the immune system through margin calls, or seemingly unbalanced positions. Indeed, like many parasites, it had turned the host immune system against the host by copying the methods of healthy traders within the system. But most important of all, the parasite was finally expunged from the system, and this left the host, and the market it acted within in a much healthier state.

I would be interesting to consider what other parasites are acting upon the market system , and how they coevolve with their hosts.

Alston Mabry adds:

Attenborough's Trials of Life videotape series has incredible, and ghastly, footage of several of these parasites and their actions ontheir hosts.

Sushil Kedia writes in:

Separation of Corporate Management from Corporate Ownership that was hailed as a quantum progress in the management of businesses, heralding an era of objective decision making by profesisonal managers, has brought in its wake massive Agency Costs.

Regular earnings announcements every quarter were made mandatory to fulfill compliance with the agency relationship corporate managements have with the stakeholders. Over shorter periods the volatility in announcements is perhaps affecting the valuation of the stakeholders' equity.

Fundamental Valuation Research driven brokerage and investment banking services were initially celebrated to have brought greater professionalism to markets to only finally ending up in being forced to have Chinese Walls and arms length existence from their Research Divisions.

The Margining System when introduced to the Clearing Houses of Exchanges was a boon for their existence and sustenance. However, when catastrophic moves occur the Portfolio VaR shoots up because the benefit of diversification dwindles as asset correlations increase. The very same margins thus shoot up unexpectedly bringing down the trading & clearing system of exchanges.

Similarly, all of the risk management technology that has come up to manage risk within tolerable ranges ends up making it intolerable, even more so as risk goes out of the tolerable range.

Banks and Investment Banks were required to operate in different segments of financial services to keep the systemic risk under check. Finally, competition in risk taking brought about a necessity for banks and investment banks to be brought back into the same circle.

The Reflexivity perspective of markets itself is akin to a virus that was initially required for our progression but has started affecting the progression itself. Markets came into existence to help us allocate resources by anticipating future events. Now often times markets are shaping future events.

The law of Diminishing Utility of Returns itself operates as if there are viruses of the types Vic  describes here, embedded within any pursuits inside the markets. A local maximum exists in the progression of each process in the market system. It is appealing to imagine that such viruses are perhaps  Nature's way of making change the only permanent process.

 


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8 Comments so far

  1. Anatoly Veltman on January 29, 2008 5:00 pm

    The Kerviel affair is much more than will ever come out. I’ve been covering the developments live, beginning 4amET 1/22, when 7,000 E-minis got lifted off of limit-down offer in CME S&P book. Only Friday afternoon, CFTC Commitment of Traders Report tabulated as of 1/22 close, disclosed large specs (read: funds) covering 62,000 shorts on that drop + opening 122,000 new longs! They were observed by me pyramiding shorts in the course of two preceding weeks, covering nothing at all - and even initiating new Nasdaq shorts after 10% decline. I didn’t just read sentiment change into their wholesale reversal over the long weekend; it would appear, that they actually wanted to get on record as longs after all.

    Korviel’s position was discovered way before the night of 1/18/2008. During that weekend, he was played for his Tom Cruise looks; and left to go home and figure out his own fourth sequel of Mission Impossible. The brains proceeded to take $1.5b loss to $7b over the next 24 hours. Let alone that someone collectively made $5b on the short; France’s second largest bank is now on the block for a song!

  2. George Parkanyi on January 29, 2008 7:17 pm

    Kerviel isn’t a virus - he’s just a humiliated and frightened young guy facing (French) jail time (ugggh). He got in over his head, unfortunately was able to cover his tracks for too long, tried to dig out by taking progressively greater risks - or maybe one huge heads-or-tails bet (both common gambling behaviour), and ended up losing instead of winning. One wonders how many times other traders have gotten into this type of predicament and were lucky enough to dig out? Even if they were detected and fired, you wouldn’t hear about it. This market downdraft flushed out Kerviel, like the Kobe earthquake flushed out Leeson. These were smart guys that got in too deep, mistakenly thought they could handle it, came to a desparate realization when they couldn’t, and finally just got unlucky.

    Why is it that no-one so far has gone nuts and let off a nuke from a missile silo? Because they never let one guy do it by himself, and they use multiple keys and codes. Maybe we could look in this direction for answers to the problem of futures contracts being turned into financial WMDs.

    Cheers,
    George

  3. Special Ed on January 30, 2008 12:47 am

    From the linked article on T.Gondii:

    “Now, the researchers speculate that low-grade infections may result in more subtle effects, such as odd behavior and IQ dips. They estimate that the parasite infects 22 percent of UK residents and 88 percent of the French.”

    Someone is trying to be funny, n’est–ce pas?

  4. George Parkanyi on January 30, 2008 10:29 am

    Here’s an interesting tid-bit to ponder (sorry, not related to viruses).

    A small news-item on Bloomberg caught my attention today. (They spent maybe 10 seconds on it, while analysing UBS’ $11B write-off ad-nauseaum.) Mortgage applications in the U.S. increased by 7.5% in the past month - mostly related to REFINANCING. (Light-bulb goes on here.) If you were paying 8% for your mortgage and now you can get the same mortgage for say 6% (rates have been coming down fast), because mortgage amortizations are so long and payments are mostly interest, you’re now saving 25% on your mortgage costs - a large proportion of household spending. That is huge in the aggregate. That money is going to start streaming into the economy - either through savings, which would re-finance the banks, but more likely through spending, which would keep the economy moving. Banks have sticky fingers when rates come down and keep a little more of the spread, which will help their profitability. So…

    Maybe I’m putting too positive a light on this because of confirmation bias (I’ve started buying financials and am 72% net long overall), but I think U.S. stocks, and financials especially, are looking pretty darned good here.

    Cheers,
    GP

  5. Lon Evans on January 30, 2008 1:57 pm

    Dear Mr. Parkanyi,

    The key term related to your observation is “mortgage applications.” What is the approval percentage? All past metrics most likely no longer apply relative to application/approval percentages. It’s a whole new game, and no one seems to have the slightest idea of how it’s played. I’ve taken the opposite tack and am significantly short. Too much has been left unsaid; too many statistics are contradictory.

    What to make of it all?

    Good luck.

    lon

  6. Lon Evans on January 30, 2008 4:25 pm

    Addenda:

    So much for the Bernake put.

    lon

  7. George Parkanyi on January 30, 2008 7:01 pm

    Well Lon,

    I don’t know the approval rates on the mortgages in question, but in general the refinancing activity benefits both the borrower and lender. I wouldn’t want to see MY customers all flaming out.

    Assuming the report meant 7.5% of ALL mortgages, that would leave about .3 to .5% of that increase being in the sub-prime or questionable category that might get turned down. A significant re-financing of the balance will inject a lot of money into the economy. If it doesn’t, then the lenders benefit anyway and their balance sheets improve more quickly. I would think the Fed has nicely “asked” the banks to be accommodative with consumers in return for cheap capital.

    To me what’s wrong with this picture is that all this bad news is out and in the mainstream and therefore already priced. “The sky is falling” is headline news, and has been for some time. For example, today UBS announced an $11B loss and nobody cared. And people EXPECT more bad news - so that’s priced. And if there’s a credit crunch, why doesn’t the demand for capital and therefore interest rate yield curves reflect that?

    I’m voting we’re good, but I stand by my constitutional right to be wrong if necessary. :)

    Cheers,
    George (you can call me George)

  8. Parasites « FIT for proFIT on February 1, 2008 8:05 am

    […] Good post by Victor Niederhoffer drawing some correlation between Parasites’ behaviour and SG blowup at Daily Speculations. Victor can always find some relevance tomarkets in anything he lays his hands on. Good food for a healthy mind. […]

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