It's spreading
Aug. 10th, 2007 07:38 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksHas anyone else noticed the similarities between the outbreak of Foot and Mouth disease in the UK and the global fall-out from the US subprime loan meltdown?
Just as the government relaxes movement restrictions of cattle, up pops the disease in Dorking, 10 miles outside the original exclusion zone. Just as Bernanke says that the subprime loans problem is contained, BNP Paribas says that it won't buy some funds because at the moment it can't sell them. Yes, it's the famed liquidity crunch. The ECB panics and pumps as much into the economy as it did in the immediate aftermath of 9/11 (an indication of how seriously the pwers-that-be are taking things) — €95bn. The markets see what the ECB has done and promptly assume that things must be much worse than they had previously thought.
Ah well, try to look on the bright side. A problem with the booming UK housing market has been the limitless supply of easy credit. The government tries to stem consumer demand by raising interest rates. But now, the problem solves itself, because the supply has been cut off. That doesn't mean interest rates will fall, because there is the other side of the equation. If people won't lend, and there are still people who want to borrow (albeit, fewer of them), then the "price" of borrowing goes up. It's all very well the BoE setting base rates at 5.75%, but there's a real market of lenders and borrowers out there. Compare it to the Zimbabwe situation, where they tried to curb inflation by not printing notes. Net result? Inflation continued and liquidity dried up because there wasn't enough cash to "oil" the economy.
The same thing can happen with interest rates. Set them too low in a credit-crunch market and all that happens is that trade dries up. So you have to inject more cash into the markets (passim, the ECB and Fed yesterday, the JCB today). All of that makes things quite exciting for the macroeconomist, but a first-impression interpretation from Birks Towers would be that you can forget any easy loans for the next 18 months. That pushes through to the "real" economy, bringing down house inflation in the UK and general inflation elsewhere. That eases upward pressure on interest rates for the "curb inflation and borrowing" reason. But it doesn't ease the upward pressure from the very unusual "encourage supply" reason. You (the Central Bank) can get round this by supplying it yourself, in the short term, but eventually the markets have to get back into gear. If they don't, you have a very hard landing indeed.
FTSE down another 140 today? I wouldn't be surprised.
PJ
Just as the government relaxes movement restrictions of cattle, up pops the disease in Dorking, 10 miles outside the original exclusion zone. Just as Bernanke says that the subprime loans problem is contained, BNP Paribas says that it won't buy some funds because at the moment it can't sell them. Yes, it's the famed liquidity crunch. The ECB panics and pumps as much into the economy as it did in the immediate aftermath of 9/11 (an indication of how seriously the pwers-that-be are taking things) — €95bn. The markets see what the ECB has done and promptly assume that things must be much worse than they had previously thought.
Ah well, try to look on the bright side. A problem with the booming UK housing market has been the limitless supply of easy credit. The government tries to stem consumer demand by raising interest rates. But now, the problem solves itself, because the supply has been cut off. That doesn't mean interest rates will fall, because there is the other side of the equation. If people won't lend, and there are still people who want to borrow (albeit, fewer of them), then the "price" of borrowing goes up. It's all very well the BoE setting base rates at 5.75%, but there's a real market of lenders and borrowers out there. Compare it to the Zimbabwe situation, where they tried to curb inflation by not printing notes. Net result? Inflation continued and liquidity dried up because there wasn't enough cash to "oil" the economy.
The same thing can happen with interest rates. Set them too low in a credit-crunch market and all that happens is that trade dries up. So you have to inject more cash into the markets (passim, the ECB and Fed yesterday, the JCB today). All of that makes things quite exciting for the macroeconomist, but a first-impression interpretation from Birks Towers would be that you can forget any easy loans for the next 18 months. That pushes through to the "real" economy, bringing down house inflation in the UK and general inflation elsewhere. That eases upward pressure on interest rates for the "curb inflation and borrowing" reason. But it doesn't ease the upward pressure from the very unusual "encourage supply" reason. You (the Central Bank) can get round this by supplying it yourself, in the short term, but eventually the markets have to get back into gear. If they don't, you have a very hard landing indeed.
FTSE down another 140 today? I wouldn't be surprised.
PJ
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
Holy shit! That was a Golden Age?
Date: 2007-08-11 09:35 pm (UTC)(And, just as a diversion, that same paper stated that "40% of school children at the age of eleven fail to meet average standards in the core subjects of reading, writing, and arithmetic." I leave commentary on this truly wise statement to those who give a fuck about British education, or can understand what an arithmetic or even geometric average might mean.)
Basically, you are absolutely correct. Something like your "second way" is going to happen. Unfortunately, this does not depend upon regression to the mean: if only. It will happen (and this is purely an ill-informed personal opinion) because financial markets have got too smart for their own good.
Were I to give a shit, which I don't, I would be very, very worried about the unravelling of CDOs and like derivatives. As far as I can see, these are not traceable, let alone transparent.
I'm guessing at a short-term market collapse whilst things get sorted out. I'd call 20% or so off the FTSE 250, followed by a partial recovery.
And, incidentally, what is the difference between "regression to the mean" and "falling off a cliff?"
Jesus Christ, man. Re-learn some maths.
PS Dollar at £0.47 between now and the end of the year. Want to take a £10 bet?
Re: Holy shit! That was a Golden Age?
Date: 2007-08-11 09:50 pm (UTC)$2.20 would be an interesting bet, and one that I might go for.
But if I did, I suspect that it would have a potential gain of a bit more than a tenner.
And be careful talking to poker players of regression to the mean. It's a topic very close to all of our hearts and is probably a phrase that poker players understand properly, as opposed to most political commentators and not a few proprietary traders, who think it means that, if you get 100 heads in a row, then tails MUST come up next time (see "buying distressed financial products at 'bargain' prices", part six).
PJ
Re: Holy shit! That was a Golden Age?
Date: 2007-08-12 03:46 pm (UTC)I'm on "buying distressed financial products at 'bargain' prices", part eight, and working backwards. I believe that this is called "contrarian." I have no use or time for either political commentators or proprietary traders, who are all, in their own little way, selling themselves, and therefore worthless.
I'd be very interested in your views on the poker angle of regression to the mean. Clearly (unless the poker player in question is chum for the sharks) this is not related to the hilarious "law of averages." I'm assuming that it has something to do with the rather more interesting ebbs and flows on the various forms of the game (on-line or otherwise), for example your ongoing musings on No-Limit.
I look forward to more insights on this.
Meanwhile, you're quite right. $2.12 is pretty much guaranteed, at least for a half-hour during frenzied trading. Whether it's justified in the bigger picture or not is a different question. So here's another bet for you (the same tenner, evens):
The pound/dollar rate to be 1:2.20 for 24 hours between now and the end of October.
Personally, I think this one's a crush. But there you go.
Re: Holy shit! That was a Golden Age?
Date: 2007-08-12 05:03 pm (UTC)As for the poker angle on regression to the mean, the most famous error in online poker relating to this is the so-called "cash-out curse". People noticed that they tended to get worse results shortly after cashing out. Reams of statistical proof was supplied.
It was then pointed out that people tended to cash out after they had had a good run. Therefore, if they just performed "as expected", they would tend to have worse results after cashing out. Nothing to do with conspiracy by the poker sites. Simply a case of regression to the mean.
PJ
Re: Holy shit! That was a Golden Age?
Date: 2007-08-12 10:39 pm (UTC)I would have thought that, having suggested $2.12 (or whatever it was), that it would be fairly obvious that I'm prepared to extend the range to $2.20. All the rest was just trying to define what "$2.20" means. We seem to be more or less in agreement on the probabilities here, so I'll try again, and sweeten the bet. (It's only a tenner, after all.)
Some time between now and October 31st, and for twenty four consecutive hours on either the London or the New York Forex, a pound will buy you $2.22. I expect the pound to buy more. (And it doesn't make any sense to me, but then I've been religiously avoiding the City for twenty five years precisely because of this sort of autistic, irrational crap.)
Me: $2.22 and up. You: who knows?
Want to put a tenner on it?
Re: Holy shit! That was a Golden Age?
Date: 2007-08-13 05:11 am (UTC)But your conclusion was far from obvious. Just because you think it will go to 2.12, that is no reason for me to conclude that you think it will go as far as 2.20. I had agreed with your 2.12, and had posited 2.20. You might have thought. "It might hit 2.12, but 2.20? No way!".
PJ