Michael,
A great commentary by Doug Noland:
prudentbear.com
What are you looking for before you put on some financial poots? Noland makes a great case for something really dramatic shaping up in the derivative world. As he says:
"So (after LTCM) reliance persisted, and tens of trillions of dollars of additional contracts were written based on models that assumed risk could be mitigated by writing insurance against, say, higher energy prices and lower mortgage rates. After all, based on historical data, what would be the probability that natural gas would shoot up to almost $10 while 30-year mortgage rates drop to 6.75%? Or, what would be the probability of a dramatic increase in the VIX (equity volatility) index simultaneous to a collapse in the 10-year dollar swap spread (traditionally indicating systemic stress)? Or, what would be the probability of spreads (to Treasuries) on corporate debt widening dramatically, concomitant with an equally dramatic narrowing of spreads on agency securities? What would the models calculate as the probability that the faltering euro could within weeks gain 20% against the Japanese yen? How about the probability of a rapid 50% drop in NASDAQ with much greater declines for many individual stocks? In the credit derivatives area, what probability would the models have placed that the major California utilities could accumulate more than $10 billion of losses over several months and be on the brink of bankruptcy? Or, better yet, what would the models calculate as the probability that all the before mentioned scenarios actually occur simultaneously? The probabilities would have been near zero, but it happened! The models don’t work."
Thanks,
/Kit |
