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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: benwood who wrote (87466)	10/9/2007 2:18:52 PM
From: stan_hughes	Read Replies (3) \| Respond to of 110194

FWIW I agree with almost everything you've said there, and I think my point is either being lost, or I didn't do a very good job of explaining it in the first place. What I was attempting to communicate is that it was not so long ago that people were able to well comprehend how their tools functioned, and therefore still had some semblance of control over them. In our time however, the tools have grown so complex that a great deal of blind faith is required to live even a simple life. We all willingly step into an elevator because we trust that it will stop when it gets to the ground floor. We get on a 747 because we trust the on-board systems to function and that they will return us to the ground safely. But whenever machinery is involved, it is inescapable that feces occurs from time to time -- elevators and planes crash, with sever negative consequences for the passengers, blind faith and all. That said, if the financial trading tools of our time have flaws, those flaws present gargantuan negative possibilities that simply did not exist in previous eras. It only makes matters worse that 99% or more of these trading systems are untested in a crisis and hence the risk of their widespread use is poorly understood. The existence of the computer-enabled and computer-facilitated $500 trillion derivatives monster out there that no one on Earth fully understands also poses another modern brand of risk. IMO these very fundamental shifts in how price is established sharply separates contemporary market risk from the days before the microchip. Ergo, old safeguards don't/won't apply. Our first real taste of what can go wrong in the financial digital age was in October 1987 with the cascade selling of stocks and futures by computers executing portfolio insurance logic. Yes, the market eventually recovered, but few would say that living through the experience was very much fun. Call me a Luddite, but I believe the constantly increasing use of computers to make investment pricing decisions based on black box models is a mistake waiting to be revealed (again), and this time the consequences could be profound