We can be Heroes
Jul. 26th, 2007 01:29 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksIt was nice to catch up with the first episode of Heroes last night, which BBC2 is finally broadcasting. There's no point in me getting satellite TV -- there's far too much that I want to watch on terrestrial that I don't get round to watching. If I was that desperate, I could download it. But the first episode was fun and I'll watch the second one tonight.
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Mr Bernanke made the observation that the sub-prime fall-out would have to reach $100bn before it became "systemic". So now I eagerly collect snippets of news, adding up the figures.
When people talk about this scale, they tend to say to themselves "wow, that's a big number", and then stop thinking about it. What they don't realize is that, even if there's only a 5% chance of such a big number being exceeded, if it is broken, then the Tipping Point will be that more serious when it is breached.
This morning, Nomura revealed that it had logged about ¥72bn (let's say, $600m between friends) in losses since January in the sub-prime sector, while Australia's Absolute Capital said that it had suspended withdrawals from two funds until October. Absolute Capital Yield Strategies Fund and Absolute Capital Strategies Fund NZD are worth US$180m combined. Basis Capital, also of Australia, is thought to have a "serious" exposure to the subprime market.
It's a bit like dropping jellybeans into a large jar. You might think "oh, we'll never fill that up". And then, once day, it does.
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Mr Bernanke made the observation that the sub-prime fall-out would have to reach $100bn before it became "systemic". So now I eagerly collect snippets of news, adding up the figures.
When people talk about this scale, they tend to say to themselves "wow, that's a big number", and then stop thinking about it. What they don't realize is that, even if there's only a 5% chance of such a big number being exceeded, if it is broken, then the Tipping Point will be that more serious when it is breached.
This morning, Nomura revealed that it had logged about ¥72bn (let's say, $600m between friends) in losses since January in the sub-prime sector, while Australia's Absolute Capital said that it had suspended withdrawals from two funds until October. Absolute Capital Yield Strategies Fund and Absolute Capital Strategies Fund NZD are worth US$180m combined. Basis Capital, also of Australia, is thought to have a "serious" exposure to the subprime market.
It's a bit like dropping jellybeans into a large jar. You might think "oh, we'll never fill that up". And then, once day, it does.
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Bernanke
Date: 2007-07-26 01:14 pm (UTC)First, you should check out the Mortgage Lender Implode-O-Meter (http://ml-implode.com) as it's tracking large lenders that "implode". This might help you tally up the numbers.
Secondly, you might like a satirical site (though it also has some good resources and news tracking) that I'm running called Bernanke Panky (http://bernankepanky.com).
We're living in some interesting times with the market - today should be particularly interesting here in the States.
The Etiquette of Tipping
Date: 2007-07-26 02:08 pm (UTC)What, exactly, is a "tipping point?" It appears to be something anecdotally close to a floor or a ceiling for trend analysts (and I've probably got that wrong, too), but does it actually mean anything?
I mean, in concrete mathematical terms. (You can muddy the waters by referring to statistics, if required.)
As far as I can see, it's the point at which the herd mentality suddenly reverses itself, turning a bull market into a bear (or vice versa) with no real reason. And what's even more interesting, if indeed it does apply to trend analysis, is that it is generally regarded as a "whole market" thing -- ie, it applies to value analysts, Black-Scholes analysts, and Mrs Nugent at 42 Acacia Gardens. In other words, you supposedly don't have to believe that it actually exists; you just need to take action based upon the presumption that other people believe that it exists.
And why is it always a nice round number? The Dow got itself out of one mess back in 2002 by reverting from base 2 mathematics to boring old base 10. Might we stave off disaster by pricing mortgage derivatives in Babylonian terms?
The tipping point is just a magic number, no? It also appears to float around, from day to day, in a stochastic sort of way. Nice to see in hindsight, but would Mr Bernanke have a hope in hell of guessing it ahead of time?
Re: The Etiquette of Tipping
Date: 2007-07-26 02:16 pm (UTC)Clearly there is a spread here.
There's probably money to be made out of this. Don't even buy or sell shares or other instruments. Just go for the spread. (Mind you, how it's defined is a fairly tricky matter.)
Re: The Etiquette of Tipping
Date: 2007-07-26 07:57 pm (UTC)I also like the catastrophe theory analogy, or the concept of the elastic band. In the former, you literally "tip over" the side as the bend in sanity becomes less and less tenable. In the latter, it stretches and stretches, but eventually snaps back. The further you stretch, the stronger the snap-back.
But, clearly, there is a range. It was many months into the fall from the 2000 highs before people were sure that the boom was over. In this sense, the analogies of bubbbles bursting, or elastic bands snapping back, are unhelpful. The turn, when it comes, is slow at first, and only gradually gathers momentum to the downside.
Except when it doesn't, and it's one cataclysmic system breakdown instead.
PJ
Re: The Etiquette of Tipping
Date: 2007-07-26 11:15 pm (UTC)As one who was hit smack in the face by the dot.com elastic band (rather better defined as "telecoms companies in Wonderland," since that particular sector was literally a magnitude worse), I beg to differ about the "2000 highs." (Quite a good title for a Stranglers song, that.) The UK dot.com business was puny and derivative compared to the US dot.com business. It never built up much momentum, and it lagged the real market. Nasdaq tanked round about April, as I recall, and the UK, as usual, just dithered around a bit.
I still don't like this talk of analogies, or of momentum. My basic point is that idiots (not you, obviously) are borrowing terms from mathematics without the slightest hint of a mathematical model behind them.
For example, your description of the "turn" looks, entirely accidentally I'm sure, like the classic A-level question in Maths & Mechanics describing a bead dropping down a frictionless, parabolic wire. It doesn't actually explain anything. It doesn't even necessarily fit.
I'm sticking by this. The whole thing is just a churn, and the best way to deal with it is to bet on the spread of where the tipping point might actually occur. I suppose Bernanke's quote on sub-prime US lending is as good as any other measure.
Things are going to get very nasty, very fast, and very soon.
On the other hand, any ideas about how this would affect the PRC's insistence on holding down the renmimbi against the dollar? This looks like a pretty disastrous policy in the short to medium term, to me. But then I'm not a collection of murderous, inbred dictators.
So what would I know?
Re: The Etiquette of Tipping
Date: 2007-07-27 10:29 am (UTC)When it comes to a tipping point - I thought that term is quite well known because of the book. Gladwells other book, Blink, was a good read and I just rushed to order the Tipping point as well and found out that Taleb has published a new book too. I ended up buying 5 books (which all are filled with mathematical terminology for me to misuse, so watch out mr aardvark =).
Aksu
Re: The Etiquette of Tipping
Date: 2007-07-27 01:45 pm (UTC)PJ
Re: The Etiquette of Tipping
Date: 2007-07-27 05:07 pm (UTC)For some reason I can't get too worked up about mathematical abuse in poker writings. If it helps illustrate a point, then fine. And besides, the reader can always vote with their virtual feet.
I do object to people being paid big bucks to talk drivel with other peoples' money, though. It's probably the Puritan in me coming out.
Re: The Etiquette of Tipping
Date: 2007-07-27 01:53 pm (UTC)This might seem a minor relaxation, until you realize that the Chinese insurance industry has about $300bn in investable assets, and this is going up by $30bn a year. It bought a 10% stake in Blackstone, one of the leading private equity players, without even blinking. It's happily punting €4bn in the direction of Barclays to help it with its bid for ABN Amro.
What does that mean? It means that the activity of China which for the last decade has pushed up the price of raw materials and commodities (and allow the Americans to live beyond their means through the purchase of Treasury Bonds) has now reached level two, and will now serve to support global equity markets to levels which even today seem gaga. Why buy equities when you can invest in the bank and get higher interest? Because China is going to be buying equities as if there is no tomorrow, and the capital appreciation could be well skanky, man.
So, there it is, I've been spending a year trying to work out where to put my money when everything seems overvalued, and the answer was staring me in the face.
PJ
Re: The Etiquette of Tipping
Date: 2007-07-30 06:38 pm (UTC)Plus which, of course, this sort of company is almost certainly the sort of company that the PRC would love to invest in.
You may, I think, be on to something here.