Oct

26

peony seed podI wonder what nature has to teach us about how it recovers from natural disasters vis a vis the current market decline. Does the process of recovery and change after fires and floods and earthquakes and hurricanes have anything to teach? I looked at the methods of seed dispersal at the Botanical Gardens recently and it made me think again that IPOs at times like this must be priced at implicit returns of 100% a year or more. I also wonder whether there are insights from the Stockholm Syndrome here with people who are the source of the disaster being greeted with love and votes and money? How does romance come into the picture? I return to the subject of catalysts in markets. Are there some agents that are sufficient to cause big changes in markets that come ahead of everything, e.g. a big move in oil that precedes a violent move in stocks? When will asset allocators begin to compare the returns of stocks versus bonds and find that their portfolios now have gone up by 20 percentage points from before in terms of their allocation to bonds? That's too much, other things being equal, even if the expected rate of returns were not changed. I can't help but think that Alan Greenspan's confession that his belief in free markets was wrong is an example of the "Old Man Syndrome" a la Cyril Burt's wanting to have the most identical twins in his study, combined with George Zachar's "your own man said you were out." Does the average politician really believe that raising the rate of contribution to the Service will raise revenues or or is just an example of rent seeking and public choice theory at work where they look out for their own personna above all, and to what extent is the likely increase in this contribution under the now 10 to 1 favored new administration a major contributing cause to the current past meltdown? What is the cause of those fantastic moves at the close that are so ephemeral and dysfunctional to all who are not properly capitalized and money-managed? Most of all, I wonder what my mentors at the University of Chicago, Jim Lorie and George Stigler, would say about the current carnage. Would it undermine their faith in markets?

Sam Marx writes:

Something I noticed about market that I tried to avoid when I had traders working for me is that the market rewards and penalizes on a continuous basis, but "employed" traders and executives are usually rewarded on a yearly basis.

Dick Fuld of Lehman, Stanley O'Neil of Merrill, Frank Raines of Fannie, et. al., received yearly bonuses, so their goal was maximizing the yearly profit while neglecting the carry-forward risks. If they had to leave a large portion of their bonuses or profits in escrow, as did my traders, to be carried over from year to year, they wouldn't take excessive risks and the market would be more stable.

Alex Castaldo adds:

The study of how nature recovers from natural disasters such as forest fires or floods is called the theory of succession and was developed by one H. C. Cowles.  Wouldn't it be a strange coincidence if he was related to the Alfred Cowles III who studied stock market forecasting.


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