Puplava Storm Watch Update: CRA$HMAKER
financialsense.com
(I sent an email to FinancialSense to offer my "25 Reasons" article in a link, and MaryP replied that JimP had already read it... way cool)
here is the conclusion to the CRA$HMAKER article
my experience indicates not a LINEAR EXTRAPOLATION, but rather...
AN EXPONENTIAL EXTRAPOLATION !!!
our cleverness has been applied toward destructive devices, not productive methods, as we have devised new techniques to amplify bubbles
heck, 2 or 3 mere THREE SIGMA EVENTS will be devastating in derivative meltdown, let alone 10 SIGMA's
Lessons Not Really Learned
One would have thought that the financial system would have learned a lesson from the growing frequency of past crises. Instead the ability of the system to adapt, mutate, and multiply new hazards has grown like an uncontrolled virus. Fed by a constant stream of liquidity and credit, the debt pyramid continues to multiply and leverage itself in uncontrolled ways. The expansion of credit and the concomitant growth of derivatives have created the need for credit swap insurance and various permutations of counterparty risk in a system that has become highly concentrated. If LTCM, with $1 trillion in derivatives and $3 billion in capital, nearly brought the whole house down, what happens if a $26 trillion dollar player with only $40 billion in capital goes down? One cannot assume that the linear relationships that exist today will extrapolate linearly in the future. Life is full of random events. Unfortunately, the financial world is based on linear assumptions that operate in a world that is nonlinear.
This is where the present system falls grossly short. It assumes that the present relationships of today will exist tomorrow. But random events occur much more frequently then admitted. This is evident when reviewing the last two decades. What stands out is that in each succeeding decade the number of crises have multiplied; while the time span between them keeps getting shorter. The '87 stock market crash was followed by the S&L crisis, the peso crisis, the Asian crisis, LTCM, Russia, Y2K and then 9-11.
Judging by the amount of credit and hot money that sloshes around the world, it appears that random events may no longer be random, but continuous. It appears that crises have become the norm rather than the exception. It is symptomatic of a system that is no longer working and indeed is breaking down. To paraphrase Warburton, all of the debt disorders and crises of the last two decades can no longer be viewed as random, but must be seen as symptomatic. A day of conclusion is drawing near. "For all our financial sophistication and cleverness, there is a sense that this confrontation with reality cannot be postponed indefinitely…there lies ahead an economic and financial event (or geo-political) of awesome proportions, one that will overturn the prevailing perceptions and priorities of the western world.”
The "day of conclusion," whether financial or geopolitical, will be a ten-sigma event. When it erupts, it will shake the very foundations of the financial system. It will not be programmed in any model, for no model will be able to foresee it. Models can give us probabilities, but they can’t tell us when those events will occur. This event, whatever it turns out to be, will be magnified in a world that has become more leveraged and synchronized. Today millions of eyeballs and computers are focused in on the very same things. Events are telegraphed instantaneously around the globe. Trillions of dollars can be mobilized in microseconds in an instinctive reaction without thought or reason. Money mobilizes faster on fear than it does on greed. Greed may be a lost opportunity, whereas fear is motivated by survival.
The stage is set and all of the props are in place for another crash. The fact that we are told it cannot occur should give an alert person reason to pause. The regularity in which financial crises keep reappearing with increasing frequency is proof enough in itself. The fact that the markets have become more leveraged with each new crisis is troubling. The intervention of central banks as lender of last resort reinforces risk taking and emboldens the reckless. Add to this the detachment of investment professionals from the consequences of their decisions which makes them even bolder in their risk taking. It is other people's money and not their own that is used in this speculator's game. In this high risk environment, risk has been defined as volatility. Leverage and margin of safety are excluded. They are considered shibboleths and anachronisms of a bygone era. Today's investment professional hides behind the safety of his models or the infallible belief in mechanistic black boxes. To them, all risk lies under the bell shape of the curve. The tail end is excluded or has been marginalized by the firm belief in the sanctity of hedges. They are asleep and unaware of the risks that surround them. There are multiple candidates. It is these risks, and their whereabouts, that will be the subject of Part 2 of CRA$HMAKER: Ten-Sigma ~ JP
© 2002 James J. Puplava
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