When Genius Failed

i think there is probly a level of safety built into the markets at this point compared to LTCM days since we don't have an "ultimate" stacked dream team fund like they were.
I mean back in the day i can see why any bank would want to lend to them and give them enough rope to hang themselves with leverage wise. I can also see why they would have been able to take on positions that were then stacked to one side. I mean i can imagine back in the day no one would have wanted to trade against them using price models when you have to try to trade against the guys who invented the model and are far more capitalized than you were.

the systemic risk has to be spread much thinner across funds now, much more "diversified" now.
 
What you are saying is true from the standpoint that no major crash has been seen for 20 years, and no minor crash for about 7 years.

However, options skews continue to be "skewey". People may believe one thing, but the way they act in the market, the memory of 1987 etc is very fresh in their minds.

nitro
Quote from jdeezero05:

i think there is probly a level of safety built into the markets at this point compared to LTCM days since we don't have an "ultimate" stacked dream team fund like they were.
I mean back in the day i can see why any bank would want to lend to them and give them enough rope to hang themselves with leverage wise. I can also see why they would have been able to take on positions that were then stacked to one side. I mean i can imagine back in the day no one would have wanted to trade against them using price models when you have to try to trade against the guys who invented the model and are far more capitalized than you were.

the systemic risk has to be spread much thinner across funds now, much more "diversified" now.
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(BTW, I can't believe I forgot to put Russia imploding on the list - a country defaulting on its debt)

Asia broke before, and it will break again - so will we and every other economy eventually. Whether or not any one country will drag the rest of the world with it is too hard to predict.

One of your major concerns is that we haven't suffered a real, protracted, grinding slowdown in quite some time in the US. We haven't experienced real pain - maybe its coming, maybe not.

I think its best to operate under the assumption that predicting is an educated guess at best - and to place your bets based on the probabilities, rather than opinions.
 
Sponger, I don't deny that. I am now invested in some gold stocks though that are development phase but have solid results in the pipeline. This is part of my hedge.

I also buy rolling SPY Puts because it's easy insurance. I buy VIX puts when they're cheap too.

I'm long with 90% of my funds which are placed in small caps that I think will weather everything except a meltdown because they're growing businesses.

My curiosity is just that we're in that stage of globalization now that is like having built a bunch automobiles and small planes and then putting it all together in a tangled weave to come out with a spaceship. Maybe it flies beautifully and never fails, but with the amount of unknowns and that includes the programming in the system we have that could just malfunction for any number of reasons, and piling on the instability in some components(Asia, S. America) you never know what will fail or if it will at all. But it is my estimation that sooner or later something will melt down in one of the weaker sectors of the world and could cause a more complex and irreparable problem than we've seen in the past due to this co-dependence and interconnectedness that has never been seen nor tested really.

The derivatives market is just icing on the cake...as it was with LTCM who had problems before even getting to their derivatives dealings.

Cheers.

And, the EU allowing so many Eastern European nations in could have some highly adverse effects. Countries like Serbia and Turkey are definitely potential problems in my book should they be included. Poland/Czech Republic, and some other nations are also of concern.

China is my main concern and I don't see how they will not overbuild in a huge way and end up with barren cities and a whole lot of problems. Maybe before the olympics, but more likely after. I expect the Olympics to be a continuing flop story as they were for Greece and think that will signal the beginning of the problems bubbling to the surface. The government there has too much control over what we see/hear/know, etc.
 
I don't think you'll find one person dealing in the financial markets that doesn't share your concerns, or have that thought every once in a while - its always in the back of everyone's mind, even if they won't admit it.

Marty Schwartz had some funny stories about those concerns (well, not funny to him at the time) in PitBull - if you haven't read it, do - pretty entertaining, and has a good section on the mindset of the individual on this topic.

Good luck trading all:cool:
 
Quote from SiSePuede!:

My whole point of this thread is that the new globalized system which is really a tangled web of derivatives/computers/countries/financial markets, etc. are much much more dangerous than in anytime past because of the interconnectedness. So while we may have been through crises before, this would be on a whole different plane because of the web that has been put together. Sort of what LTCM did, but on a global scale involving not only separate funds and banks, but also countries and systems.

So while the media says that US markets buck the trend when Asia falls 5% and we go up, that's just the markets and not a true problem. Their markets aren't necessarily connected to US markets. But if Asia had a crisis, whatever it may be, that affected Asia, you should easily believe that US funds, markets, etc. will heavily feel the impact and if it's a natural disaster, economic breakdown, etc. etc. US companies will heavily feel the impact.

I just wonder how the markets will handle something on a larger scale because while the US markets can weather a lot...Asia is still young in the way of financial stability and more and more our markets are dependent on them for growth in the world and if Asia breaks we will too.
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If anything Id say the interconnectedness makes things more safe not more risky. The repercussions may be broader, but probably less deep. If there is a crisis in Asia, and US funds feels the impact, it means Asian funds feels less of the impact than they would if only people from Asia invested in Asia.

It’s probably true that the more international funds invest in Asia, the more Asian funds invest in the rest of the world. If there is a crisis things can rebuild faster since less of the wealth of the people living in the region was lost. Faster rebuilding and more globally shared losses limit the dept of the local crisis and thus the potential to cause a really big global crisis.
 
Quote from Voodoo-king:

If anything Id say the interconnectedness makes things more safe not more risky. The repercussions may be broader, but probably less deep. If there is a crisis in Asia, and US funds feels the impact, it means Asian funds feels less of the impact than they would if only people from Asia invested in Asia.
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I understand your point. But I don't see how such a hodgepodge of interconnectedness could make anything more stable. Derivatives add a whole extra layer of potential mess and breakdown possibilities.

You have to remember that liquidity is only useful in markets where no one is selling, panicking, etc. If all of a sudden a natural disaster hit, a currency collapsed, an economy imploded, a market for something fell out, etc. everyone might head for the exits triggering panic.

You can never never totally prepare for what panic will bring and my point is that with derivatives, computers, and the high flying valuations in much of Asia, the market bottom dropping out could happen on anything. The whole system is dependent on the rest and so while a normal occurrence might be a bubble popping, if there's a true crisis that affects S. American copper production, or Asian demand, or whatever you want use for an example, you never know what that could trigger in turn which could trigger something else in turn, etc.

There is no way to prepare or know, but I think that now, although the system that we all use might be beefier and thicker, that doesn't mean it isn't made of more fragile material or isn't being balanced on a thinner plate proportionally than at any other time in history.
 
Quote from SiSePuede!:

You have to remember that liquidity is only useful in markets where no one is selling, panicking, etc. If all of a sudden a natural disaster hit, a currency collapsed, an economy imploded, a market for something fell out, etc. everyone might head for the exits triggering panic.
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I agree. One remark from the book "When Genius Failed" described the lack of buyers in a 'perfect storm' resulted in normally uncorrelated markets approach a correlation near 1. How can adding more markets, and making them more interdependent, reduce this risk?
 
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