The Economist: Volatility, When It Returns, Will Devastate the Markets

[nitro]

Quote from Sparohok:

A black swan is by definition something you haven't seen before and can't predict. A massive terrorist attack is a light grey swan. Everyone is expecting it sooner or later.

....

Martin

Maybe. Imo the terror attack is expected and is light grey. What is not expected is the craziness of the attack. Detonating a dity bomb that kills 250,000 people is totally unexpected (it may be expected only in the sense that it is possible). That is black swan imo.

More importantly, you can't trade based on waiting for 3 Std Dev events. Traders take on waaaaaaaaaaay more risk than that all the time, e.g., in the form of Risk Arbitrage. If your game is to "trade" 3 Std Dev events, you are not a trader, but closer to a gambler.

These articles come out when the market hasn't had a pullback of any significance in a long time. Other than that, there is no real scientific basis to believe that it is due for a correction.

ES goes to 1528 (based on M7 contract). Then 1550. At ~ ES 1550, there will start to be some harsh back and forth movement in SIFs because at that point the R/R is thin and lots of profit taking will start to take place. But even there, there are strong arguments for ES 16xx.

Even if the FED raises rates, the market may rally (eventually) on that event. Markets often do that - it depends on whether collectively it thinks the underlying reason the FED is raising rates is good or bad news for the stock markets.

If the black swan comes, all best are off, but who trades this way?

nitro

 

[gnome]

Quote from nitro:

"... there are strong arguments for ES 16xx...."

Actually, there is only one which matters... it's the same one for Dow 40xxx... The market is running on "money pump" and its psychology.

At some point when the markets rally to "a gazillion", 99% of us will be pining for "the good old days".

 

[nitro]

Quote from gnome:

Actually, there is only one which matters... it's the same one for Dow 40xxx... The market is running on "money pump" and its psychology.

At some point when the markets rally to "a gazillion", 99% of us will be pining for "the good old days".

DOW 40xxx is ES at about 4000, a ridiculous comparison.

However, I agree with your assesment of one of the causes of the rally - there is tons of money coming into the markets creating more demand than there is supply at all these levels. That is tautologous.

But I claim that the relative valuations and fundamentals are reasonably priced here as well. Over the very long term, the people buying now are not buying expensive is what I am saying , barring a paroxysmal volcanic explosion

http://en.wikipedia.org/wiki/Yellowstone_Caldera

or some other 20 Std Dev event like that.

nitro

 

[PohPoh]

"tautologous"

Great word Nitro...had to break out the dictionary...

 

[Mvic]

I think the most likely Black swan will be the vanishing of liquidity, almost overnight in the desk traded exotic CDS and CDOs, especially on EM debt. The house of cards is built on the leverage provided by these things. My guess is that a large currency move will be the precipitating event.

 

[fletch2]

Quote from nitro:

Detonating a dity bomb that kills 250,000 people is totally unexpected (it may be expected only in the sense that it is possible). That is black swan imo.

No, that is a green swan with purple stripes and a mohawk.

No such thing as a "dirty bomb that kills 250,000".

 

[nitro]

Quote from fletch2:

...No such thing as a "dirty bomb that kills 250,000".

Right, 250,000 is too high for this sort of weapon.

I have never understood why the number isn't much higher than what they usually quote though. Why aren't the casualties close to 100k in stadiums where there are 125K people concentrated in one city square block?

nitro

 

[Sparohok]

Quote from nitro:

If the black swan comes, all best are off, but who trades this way?

Everyone who wants to stay in the business.

Here's the way I look at it. In my mind, I've got a trading department and a risk department. The trading department's job is to make money in normal times, 99.9% of the time. They don't care about black swan events. But the risk department thinks about nothing else. Every big trade I make, particularly derivatives trades, they think about what type of event it would take to bring my portfolio to zero. And the risk department has the authority to override the trading department.

So I don't think we're disagreeing, really, but I do think black swan risk is very important to independent traders -- even if our "risk department" is just a figment of our imagination.

There are guys like Taleb who actually trade on black swan risk but I don't think that's very practical.

There's a book I really like on risk control called "Iceberg Risk" by Kent Osband. Different analogy, same concept.

Martin

 

[Covertibility]

Quote from ByLoSellHi:

They called the U.S. housing recession absolutely brilliantly, though, in July of 2005, a year before it began.

They called housing a bubble in 2003 at least, maybe someone knows of prior articles since some where calling for housing dowturn in 2001. The magazine is a rag and this article is fluff. Buttonwood would stick to writing about artwork.

 

[lloyd111]

Nothing can deflate this teflon market,all bad news slides off all good news sticks.