May

21

Suction is the production of a more or less complete vacuum with the result that atmospheric pressure forces fluid into the vacant space (OED definition)

To what extent did the big down moves in such markets as gold, Russia, Spain (down 24% on year), Italy (down 15% on year) and Europe cause the decline with a lag in US stocks. Is there a general phenomenon with which suction can predict declines in closely related geographic areas? How does the concept of substitute good enter into the fray. A substitute is defined as a good whose price rises as the other good rises  A complementary good is one whose price declines as the price of the other good rises. Are bonds a substitute for stocks? The dollar? What are the predictive relations?

Gary Phillips comments: 

It seems many of the moves and traditional correlations occur without much logic behind them and have little to do with valuation fundamentals but rather with the tactical games the liquidity providers play.

Also, country ETFs emerged as an asset class and this has contributed to increased price volatility.

Similar phenomena were seen with commodities whose financialization led (see Tang & Xiong, 2010) to increased price volatility of non-energy commodities and an increased correlation to oil.

Another factor to consider may be global QE policies. Each country that adopts QE [Quantitative Easing] creates mispricings in assets and goods & services; however, the Central Banks have no control over which assets are inflated, to what degree they are inflated, or in which countries they are inflated in.


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  1. douglas roberts dimick on May 24, 2012 11:57 pm

    Queries

    V, probably bad form here to answer your questions with more questions, but…

    1. To what extent did the big down moves in such markets as gold, Russia, Spain (down 24% on year), Italy (down 15% on year) and Europe cause the decline with a lag in US stocks?

    The vacuum to which you refer… Are those related shifts in values and liquidity not the natural ebb and flow of the larger US-EU (private, public, and sovereign) bankers cashing out and moving into variably under/overvalued asset classes and equity sectors?

    Caveat: I am acknowledging Middle Eastern and Asian banks primarily in a second tier here, though much of “their controlled wealth” may fall within that US-EU first-tier.

    I understood that (what Gary references as) those” liquidity providers” are in a Madoff-like position. BM was able to hoodwink/swindle/defraud everyone (including the government regulators) because he was positioned at the transactional nexus of the industry.

    By way of analogy, in the health care field, there are the physicians, whom health care managers worship as the "gatekeepers." They prescribe (non)reimbursable treatments and medications. Do not those first/second tier banks function likewise here via liquidity and market making functions?

    2. Is there a general phenomenon with which suction can predict declines in closely related geographic areas?

    Feeling as if on unsure footing here when approaching your question, I pause before saying that this is a layup… skeptical as one may not believe the answer is that simple…

    You mean like Greece or Spain or Italy or (in another context perhaps sooner rather than later) China?

    3. How does the concept of a substitute good enter into the fray — bonds a substitute for stocks, the dollar — a la predictive relations?

    By “predictive”, I presume you asking what can be quantified. If so, and if this third question is operating under the assumptive answer of “yes, like the EU crisis” of the second question, then I would ponder how quantification “comes about” into Gary’s primary (tactics) explanation…

    Seems to me, accepting Yishen’s recent rationale on the nuts and bolts of investment banking…

    See… http://www.dailyspeculations.com/wordpress/?p=7371

    … the dilemma of quantifying substitution (as a barometric measure, if you will…) is identifying how those liquidity providers move from market to market, arbitraging from highs to lows then lows to highs in cyclically dispensations. Hence your introduction here of the substitute goods concept…

    Those banks are merely shifting in and shifting out of demand curves, which they in turn either control or can influence depending on the “quantitative relativity” of demand as assimilated among one or more of any given (private, public, or sovereign) banker-player’s inventory or (client) appetite in correlation to any one or a correlated series of markets. The bankers are the gatekeepers a la controlling issuance and capital flows from one asset to asset, market to market – as do physicians with prognosis and diagnosis in managed care (e.g., the HMO).

    Points of convergence and divergence then may be correlated via resulting positive and negative cross-elasticity of said demand curves. Arbitraging such strategies then would include complementary assets and markets.

    Not exactly rocket science as it appears, but more so a shell game – hence the Madoff reference.

    Is this line of thinking where you are intending to lead us to here?

    Thanks.

    dr

    Ps. This past week, I had an enlightening dinner with two visiting French professors of economics of the Universite de Technologie de Compiegne. Yann and Pascal are proving an exchange program between the two schools, UTC and SHU.

    The senior among us, Yann predicts that Greece will not leave the EU. Tourism, banking, and tax-base realities mostly unique to Greece (but shared in varying degrees by countries like Spain) buttress his reasoning. Pascal concurs with Yann.

    What struck me (and an American with an undergraduate educated level perception of economics) about both – and to that I humorously ribbed them about – is their overriding prioritization of commercial/economic/political issues based on GDP. I told them that they are worshipping a false god contra job growth and the importance of small business to realize robust economics within a given national or regional social-economic order (e.g., the US since “free trade” agreements became sexy as well as formation of the EU as an introduction of federalism among the free, democratic states of Europe).

    I post script this dinner-aperitif conversation because Yann made a reference to the OECD in a parry to my UN-NY stab during our France-contra-America segue of the evening. One may consider how the OECD provides a nontechnical framework for benchmarking that “general phenomenon” alluded to by the chair at the open here.

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