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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  1. michael bonderer on October 26, 2008 6:25 pm

    Would it be unfair to attribute this self-doubt and second guessing of free-markets to a combination of NBC/MSNBC holiday parties and the vulnerability of old age? As for the subject of catalysts, where were the Boards of GS, MS, LEH, MER, AIG and others? So, as CEO of GS in the early 2000s, you go up to the Hill to help get regulatory relief to pave the way to leverage your balance sheet from what 8:1 or something to like 35:1 or something. How did any hypothetical discussion go? As a Board member you're on one committee or other and you get Quarterly, maybe Monthly financials, and you go, 'oh, we levering from 10:1 to 23:1, pretty nice expansion of The Sheet, what's going on?' And the CEO goes, 'yeah, we're cool, I got a bunch of guys working 24/7 on documentation for some collateral stuff, check out these fees, everything’s' good'.' We're good'. And as a Board member, you go, 'terrific, keep it up, in fact, let's go 45:1.' Or did, a Board member get a monthly statement and he looks at it, and The Sheet's gone from like 10:1 to 22:1 and he glances down at it, and says, 'kindly pass the cocktail sauce?' I mean, what? Now, you're not some unsophisticated German regional bank that is reaching for triple-A yield. Or some former French agricultural cooperative that moves in a heard, no you're a Board member of GS or other bulge bracket firm. Bulge-Brackets have desks that know risks, and understand liquidity These are private businesses that know better then anyone or entity what the consequences of leverage and illiquidity are. These are private decisions. Were where the questions? What's the excuse for any one Board member, for letting their businesses go 40:1 with this stuff? I'm asking? Where are the Board questions? Are there any? Just one! 'Hey, great, The Sheet's expanding, I need some insights here?' Why even have boards? Maybe this is further evidence of how luxurious is it is to trade your own book. The resurgence of The Speculator. There you go Vic and Laurel, the thesis for your new book. "The Resurgence of The Speculator In the New Marxist/ Socialist Post Financial Apocalypse World. Then what happens when you do too well? Confiscation? ‘It's not appropriate for individuals to profit like this, the new refrain might become. 'Seeds can't be dispersed in this manner.' Another thing, I don't get this argument. 'Alan Greenspan kept rates too low for too long'? So, individuals were somehow forced into nasty decisions by reaching for yield because the Fed kept rates too low and these individuals are somehow absolved from culpability because had Alan Greenspan not held rates so low for so long, these individuals would never had reached for yield, whether these decision makers were in France, Bavaria, Iceland or 85 Broad goes the argument? Or am I missing something?

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