Apr

1

 There are four systems that limit one’s ability to run fast, these roughly break into the four classifications of runners: The sprinters, the middle distance men, the distance runners and the marathoners. Each of these runners  train and maximize their specialized capability. Key to developing a niche in running is learning to maximize the efficiency of the many systems working in unison. The sprinter works on explosiveness. The middle distance will work on his kick, or sprinting after running hard. The distance guy his endurance, while the marathoner will work on fuel efficiency with the extra long runs.

However, each of these runners has races where they must master the bordering system’s limits.

For example the sprinter power system, explosive power only lasts 15 seconds, but many sprinters run fastest in a 200 meter race and the best can extend into the 400 meter race where they race for about 45 seconds. The Middle distance man must have the explosiveness like the sprinter in the 400, but will need the stamina of a distance guy in the 1500 m or mile. The distance guy will need some of the kick of a middle distance guy in the mile, but will need the marathoner’s efficiency and economy of energy to delay and withstand “the wall” in the marathon. And the marathoner will need to pace their efforts, carefully tread the line of their own equilibrium breaking point, not to “blow-up” even before the wall, like the distance runner. And the starting point and finish lines are not always clear in life and investing.

More general estimates can help determine which system limits are most important with-in the current environment. And then prepare yourself for the point in the race you find yourself at. Lackey commented on discussing my running how similar the jargon is to BMX’ing when a race goes bad. There is the “blow-up” or “explosion”, “the gorilla jumped on your back” also the “crash and burn” are a few terms we share. Likewise the four types of runners talk of similar terms when they talk of pushing their systems limits.

Basically, what all these races seem to have in common, is that all the body’s systems are affected simultaneously when their specialized critical function breaks down. The champion in each of these races is the person that can hold it together longest while their specialized system has already been depleted.

This reminds me of last year blow-ups, when everything was converging to correlation 1.0 and the only ones making money were those short the markets, any market. Those that held off the down turn, were the winners in the endurance test. In a race the worst thing you can do often is to compensate for the pain. Like in the race it often comes down to who is able to maintain their form, balance and coordination the best under stress and break-down of their power generating systems. Easing up due to crossing the lactic acid threshold for example will slow the heart rate which dumps even more lactic acid in your system due to the lowered equilibrium from the slow heart rate. Changing stride for a blister will end in stressed or pulled muscles, etc. One must wonder how the financial systems will respond the the compensation the government(s) are giving to those systems most obviously over whelmed. Further, I will leave it up to those more skilled than me to catch those falling knifes, while everything's going down.

In contrast, after the race when things start to heal, it becomes much clearer which systems actually suffered most. It may be a specific area such as strained muscle, blisters, banged up knee. Or a system taxed dehydration, kidney problem, hypothermia, etc. After the race the correlations decouple, the healing efforts and attention shift to individual damaged parts.

Would the markets correlation’s regime changes respond similarly when placed under severe stress?

In other words are there three correlation regimes to the markets?

  1. The “efficient” regime when the systems limits are not stressed, the specialist clearly reins
  2. The stress regime when every system crashes together and
  3. The “healing” regime where capital goes to where the most recovery is to be expected?

(I'll leave it to the reader to come up with his own hypothesis to test of changing correlation predictabilty, concurrence or lagging corresponding to these regimes).

This article blames the current crisis on those unable to comprehend correlation’s regime change after years of "normal" or booming housing market. Those correlations became gospel and developed a "free lunch" top credit spread, which of course necessitated a change in which every correlation approaches close to 1.

One must wonder, after reading it, if the bears, who clearly see both "the cause and effect" and "the why and how" every correlation must go to 1 in times of stress and all system crash together, will likewise be able to see how and why things must decouple.


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