Monday, March 21, 2011
Last week we wondered what the solution would be to an equation we posted. We have since added a few more major variables that at any other time would be classified in their own rights as black swans. But as we stand today, looking at where bonds, fx and equities are you would imagine that the Grand Unified Theory of black swans gives a surprisingly simple answer.
Earthquakes x 2 + tsunami + rebuild + sentiment +/- GDP + capital flows + reinsurance flows + borrowing - nuclearpower + energy substitution - exports + imports + G7 intervention + Libya + Bahrain = 0
We like black swans in general and consider them a wake up call to those that insist on driving the market's highways with the windscreen covered up, only using the speedometer and a highly expensive, well polished rear view mirror to guide their way. That works fine on gentle bends, but a sharp deviation has you in the ditch in moments. The last couple of weeks have seen this back fitting of historic scenarios go into overdrive and the desperation to make them fit reminds TMM of their youth, when trying to get the last 2 pieces of their convoluted Scalextric track to meet up. If you bend it all enough you MAY get it to fit.
So far we have been told that the ECB is rerun of 2008, the bond market a rerun of 1994, the equity market is a rerun of 2001, which was a rerun of 1987, which all were/are a rerun of 1930's. But did the traders of 1930s say "this is the 1870s again" and try and model that? Did the 1870s traders model the South Sea Bubble, and originally in Babylonian times. did some wheat trader, when faced with a rust outbreak, cry "Oooh, it's just like the Mammoth Famine of 7000BC"?
TMM would like to think that although they know that human behaviour is pretty consistent in times of massive stress, maybe this eyrar of black swans is indeed different and NEW. The interesting thing is that, though the short term and spec market has been through hell and back, Mr Johnny Real Money player may well be starting to cry "You know what? If disasters A + B + C +..= 0, then I AM IMMORTAL AND CANNOT BE DESTROYED, FOR I AM UNCH ON MY AUD AND UNCH ON MY JPY and on my short bonds have only just got my feet wet and, as for equities, well they are screaming back too... WOOHAHAHAHA". That is, getting a wee tad cocky.
The Nuclear Physics PhD Q.E. program has achieved complete devaluation of nuke opinion and leaves TMM wondering which course will be popular next. Generals are back in fashion, but once again we've been here before. Rather than try and study a new fear function we wonder if the market is actually fed up with it all and is going to chuck it in and head for a bit of R+R in Ibiza. It certainly feels like that today with the few players left on campus hoovering risk assets again, playing the core theme of the past 3 months - Liquidity induced growth.
TMM are still very worried about where that will pan out as we return to a full "risk on" mode, as numbness from recent experiences hasn’t yet worn off. The same appears to be rampant in the household sector where Joe Public has been taught that money is to be forever free and, hey, so what? With what's going down in the world he won't need it, as there may be no tomorrow.
Lets just all enjoy today while we can.