Didier Sornette On "Critical Market Crashes"

Tyler Durden's picture

Periodically we like to repost Didier Sornette's must read paper on general market instability, titled simply enough "Critical market crashes", which has shaped much of the Zero Hedge philosophy on market topology, microstructure, and general market themes. We present this without commentary as we do not wish to shape our readers' apriori perceptions. The 98-page paper is arguably just as important as any philosophical paper by Taleb when evaluating the scalability (and fragility) issues associated with modern market theory (or lack thereof). The paper, written in 2002, predicted many of the critical tensions prevalent in modern markets, and goes so far as to anticipate the fractal and chaotic behavior of the primary faux market makers exhibited in today's distorted market structure, a phenomenon recently proven from an empirical standpoint as discussed previously.

A key excerpt from the paper:

If large financial crashes are “outliers”, they are special and thus require a special explanation, a specific model, a theory of their own. In addition, their special properties may perhaps be used for their prediction. The main mechanisms leading to positive feedbacks, i.e., self-reinforcement, such as imitative behavior and herding between investors are reviewed with many references provided to the relevant literature outside the narrow confine of Physics. Positive feedbacks provide the fuel for the development of speculative bubbles, preparing the instability for a major crash. We demonstrate several detailed mathematical models of speculative bubbles and crashes. A frst model posits that the crash hazard drives the market price. The crash hazard may sky-rocket at some times due to the collective behavior of “noise traders”, those who act on little information, even if they think they “know”. A second version inverses the logic and posits that prices drive the crash hazard. Prices may skyrocket at some times again due to the speculative or imitative behavior of investors. According the rational expectation model, this entails automatically a corresponding increase of the probability for a crash. We also review two other models including the competition between imitation and contrarian behavior and between value investors and technical analysts. The most important message is the discovery of robust and universal signatures of the approach to crashes. These  precursory patterns have been documented for essentially all crashes on developed as well as emergent stock markets, on currency markets, on company stocks, and so on. We review this discovery at length and demonstratehow to use this insight and the detailed predictions obtained from these models to forecast crashes.

Must read: Critical market crashes


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Trimmed Hedge's picture

I like how ZH claims that POMO supposedly only goes into shit like AMZN and AAPL -- but never into gold.


hack3434's picture

Why would they go into the one asset class that people go into when confidence is lost? 

frankTHE COIN's picture

Trimmed... come on... snap out of it !




frankTHE COIN's picture

And i now notice that the first 5 of us here has been " junked"... hmm

Gibson's picture

The junking is, in a sense,  evidence of herding behavior.

Very often, any comment that fails to champion the end of the world, equity market crash or complete social decay, is junked.

EscapeKey's picture

Oh, I'm sure a chunk of the money goes into margin accounts, to extend their already massive short positions.

And they do sit on short positions.

tom's picture

These POMOs aren't QE, as they aren't creating any new central bank money.

The question is how they affect allocation of existing money, and whether they spur creation of commercial bank money, ie credit expansion, and if so where that goes.

We're talking about roughly $20 billion a month that the Fed appears to be sucking out of mortgage markets and squirting into Treasury markets.

That displaces some of the market demand for accumulation of Treasuries. We're talking about the pension funds, foreign central banks and other conservative investors that constantly accumulate Treasuries. To accommodate the Fed's buy, they had to reduce their accumulation of Treasuries by about $20 billion per month. Some part of that was accomplished very simply, as they just buy MBSs instead - they just traded places with the Fed in the MBS/Treasury markets. Some part goes elsewhere, in all kinds of ways, and probably does somewhat increase the pace of credit expansion. It does matter but I doubt it's really the reason for the current ramp.

The prospect of real QE is the reason for the ramp. Real QE is another matter entirely. If the Fed's going to buy $1 trillion a year of Treasuries, that's $80 billion a month. Even if $20 billion a month is funded from the Fed's retiring mortgage debts, that's still $60 billion a month of newly created central bank money. This is nothing like 2008-2009, there is not a mad scramble for cash underway that could absorb that much money creation.


Dagny Taggart's picture

Gold is the enemy of the central bank. (But, you gotta think the Bernankster has a private hoard)

SloSquez's picture

Not finished, but thanks in advance TD. 

gwar5's picture

That is good reading and needs to be read twice.

It is especially noteworthy that this was from an Institute devoted to science and physics, people who deal with the real world, unlike economists who live in a world governed by the laws of elastic morality.

jm's picture

We review this discovery at length and demonstratehow to use this insight and the detailed predictions obtained from these models to forecast crashes.


You can fit a just about anything in sample when you have that many estimated parameters in model.  Out of sample signal to noise is what counts.

Sornette's track record at prediction isn't especially good.

Janice's picture

I did not click on this link because it has all the makings of a sleazy advertisement.  Why don't you peddle your snake oil elsewhere?

RecoveringDebtJunkie's picture

Karl Marx may not have had the advantage of the insights gained from complexity theory and computer technology, but he did a pretty good job predicting many of the economic/financial dynamics we're seeing 150 years ago.




Mercury's picture

But he fails to grasp some critical concepts about how free enterprise works and how incentives dictate outcomes in my opinion - specifically in regard to what he called surplus value. [I've read explanations that this is somehow different from value added but frankly, this seems like splitting hairs to me]

A big problem for Marx seems to have been solving for the value of a resulting product that is greater than the sum of the labor and materials that went into it: $10 labor + $10 of stuff = $30 worth of finished product...how could this be? where did that extra $10 come from?

His conclusion seems to be that the worker is getting paid by the hour (at a sticky rate that isn't easily moved upward) but his real value lies in his capacity to work which the capitalist factory owner (or whomever) captures for himself.  The worker can't lay claim to any of this surplus value created because he doesn't have equity in "the means of production."

Well, we all know where that line of thinking led....

What Marx fails to recognize (as far as I can tell) is that the capitalist manager/owner not only controls the means of production but he also bears the RISK involved in the enterprise.  If there were no risk involved everyone would be taking $10 of this and $10 of that to make $30 of something new.  I mean, what the hell Karl?

- - -

I do look forward to setting aside the time to read this paper. I love this stuff.

New_Meat's picture

Hg, or can use the GM value proposition for the Volt--$20k material + $21k labor + $2.2k health care = $41k sell price with a credit of $9k for "energy efficiency" net sell ~$32k.

Marx IS wonderful.

- Ned

stollcri's picture

The problem I see with the risk argument is that the worker is usually the one exposed to more risk. When there is a downturn such as this one who looses their income stream? (OK, I have heard about the 99 weeks of UI)

What risk is someone like Donald Trump taking when he borrows money to start a venture? So, his company (not him personally, he extracted his paycheck) doesn't pay the bank back, then does the bank bear the risk? I think that the worker (taxpayer, who are mostly workers) ultimately bears this risk here too.

Maybe risk is supposed to be a key feature of the capitalist system you are thinking of, but it is not part of the one we have here in the US today.

Bob's picture

Yes, unfortunately, both paradigms at the "idealistic" ends of the continuum fail to accomodate the full realities of both labor and capital in the world of human beings, power and politics.

Mercury's picture

Sure the worker risks losing his job...but in what state of nature do humans enjoy a risk free lunch?  A free enterprise system should be compared to real alternatives, not some sort of Utopian ideal.  There is no default mode of bee-hive collectivism for humanity. 

The type of risk to which I'm referring here is attachment to the enterprise.  The worker in theory, and often but obviously not always in practice, is in a much better position than his capitalist boss to pick up stakes and sell his labor somewhere else.  The capitalist, who may have mortgaged everything he owns on his venture, is fated to sink or swim by it's successful -or not- outcome.  Sure you can shield yourself from much personal loss by running the business out of a corporation but that's no magic free ride either - or else everyone would be doing it for all kinds of things. Someone is putting up the capital to start that business. 

If corps. get the government to cut them in on deals, protect them from competition and otherwise give them special treatment (like TBTF)...well, that's just not free enterprise, it's something else.  On balance I think it is beyond question that when proprietorships evolved into LLCs, risk became more manageable and eventually, warts and all, the standard of living for literally everyone in the developed world rose substantially as a result.

BTW it's a pet theory of mine (and probably not original) that "capitalism" is essentially a Marxist term invented by the man himself and really set up as a straw man to knock down. The term was employed once or twice before in history but "capitalism" as we think of it is really how Marx says we should think of it and I'm not sure that's all that accurate. I think modern capitalism came into being when abstract representations of value and capital: debt, insurance, equity, claims on property, etc. became the dominant driver of economic activity.  This probably happend first in the Medici era but possibly elsewhere too.  Nowadays pretty much every modern society is "capitalist" in the sense that even in the most dictatorial or socialist countries, the ebb and flow of little bits of paper (real and virtual) bearing payment, ownership and obligation status, determine and underlie pretty much everything that happens in the economy.

To me, "free enterprise" is really what's important plus what supports it: the rule of law, property rights, civil rights and all that good stuff that makes free enterprise possible. There's less free and there's more free (and the trade-offs that go with each) but it seems obvious to me that any system that unduly restricts free enterprise wrongly inhibits human potential.

Many of Freud's conclusions aren't really taken that seriously anymore but the man is still a giant because he was really the first person who thought in the way that he did about the human mind and attempted to describe it in a scientific/philosophical context.  I think of Marx in much the same way.


RecoveringDebtJunkie's picture

As the above poster mentioned, workers bear a good deal of risk in any capitalist venture, as they absolutely count on keeping their jobs to provide for themselves and their families. This becomes increasingly true as the system progresses and wealth inequality increases. It is also true that capitalists can factor in the risk of failure when making hiring and salary decisions.

I also think Marx was more focused on the collective dynamic of capitalism. Some capitalists may fail in their ventures and take substantial losses, but this just benefits other capitalists and helps them concentrate more surpus value. On the whole, the unsustainable process continues until it can't anymore.

That being sad, there were flaws in Marx's labor theory of value because he assumed labor was the only input to production that could create surplus value. This flaw diminishes his notion that the capitalists' rate of profit tends to fall over time solely as a function of limits to labor.

doolittlegeorge's picture

technology matters.  don't tell the government that however.  they have a claim on that, too.

ZackLo's picture

I think marx was a joke...the worker and capitalist warfare arguement is null and void, nothing at one time in this country was forcing anyone to do shit vut with all this government intervention to stop the greedy capitalist sure has snuffed out all the competition made the cost of production mighty fucking expensive unless of course you get government susidies or government subsidized loans. All of course stemming from the desecration of the currency because you know thats the first thing marx would have done walking into any form of market economy. Having a central bank is to distort markets because it requires a monopoly of some form on the medium of exchange and requires a debt in that medium of exchange to finance preferrably coming from the individual..you know the worker that just wants taxes to go away that subsidize the monopolies the government is to afraid to let fall, ..in our society workers can become capitalists or they could...before 1908...

You find a way to make  goods appear out of thin air with no energy (real,moral,physical,thoughtful) cost...then find away for us all to have an economy where nobody exhanges anything..because thats what communism ends up trying to accomplish with no plan....good for hunter gatherers but not really if you want to accomplish anything important...well even they have to hunt for the goods......man reading marx is LIKE GOING BACK TO THE STONE AGE!! I do fancy all this technology though..


may I suggest this?


our founding fathers called this collapse alot better then marx did..  saying marx predicted today is I think giving him to WAY to much credit because his ideas specifically caused his collapse...freedom isn't easy and neither is capitalism (and I assure you we have neither) Because freedom will always result in some form of market, and capitalism is the means to create a determinable value and finance the goods to provide the goods...


may i suggest?









doolittlegeorge's picture

no doubt "it changed in execution."  marx and engalls thought the revolution would come in the industrial world.  instead it came in agrarian Russia and then moved to many other agrarian societies.  needless to say while they made terrible peacetime economies they sure made lots of tanks and planes so they at least had "the production thing" down pretty good...let alone the "service and sacrifice for the Motherland" ironically.  of course "there is the issue of shortages."  you wouldn't think this would be a problem in a society where resources were in massive surplus such as Russia.  and herein lies the problem of "government capitalism"  what's the incentive to work and be "additive"? or worse yet.."to be trusting."  that's "faith based" and "a sure sign of weakness" according to the marxists.  sure you can field top shelf Olympic teams...but then what?  and of course this appears to be our failing right now...we're obliterating those resources that produce wealth both in our society and all the other societies as well.  the result?  idle production and people just "standing around."  needless to say "the God thing is number one on the hit list."  it's what i respect about Islam though not because i want to.  they never fell for Marxism because they understood faith is a most powerful of things.  How ironic that "our Marxists are in Afghanistan, too."

gerd's picture

sornette is last one left....

rosenberg new lows- fail, prechter crash resumes- fail,

charles nenner, arch crawford, hindenberg omen- fail, fail and fail.

lewy14's picture

Look, if the market is going to crash, it will first confound everyone.

It will "prove" all the bears "wrong". Then crash.

(Of course, your "crash" will be my "fall sales event", which I'd been really looking forward to. But then, that's the problem, likely - too many people like me who would love another crack at cheap assets, who were too chicken to swing for the fence the first time.)

doolittlegeorge's picture

again:  "you have to define the market."  the penis envy of equities is just that:  envy.  debt markets and in particular THIS debt market is absolutely HUGE.  If that sucker is a bubble it will make 2008 look like paddy-cake.  On a side note  I still find it funny I'm more capitalist than Larry Kudlow.  He's the "New York City Patriot" although surely not nearly as irrational as the "New York City fanatics" who inhabit CNBC.  This of course is not a weakness in my book--just make sure you hit the right mark when you spew your hate.  Targeting a guy like me is the ultimate form of weakness--especially when billionaires are "showing up in court to demand their money back."  And the reason for that is?  Well...r u out of money?......or is it just "stuck in a bank"?  There's a famous music hall i believe in Chicago that "faces west" because the architect couldn't stand New York.   And of course "herein lies to problem of vengeance being one's sole raison d'ete."  In the end...everyone dies.  If only we could just play baseball and leave it at that.

williambanzai7's picture

This is primo reading. Tnx for the heads up!




Hephasteus's picture

Machine Aided Shit Cloaking.


EscapeKey's picture

Richard Duncan's 2003 book "The Dollar Crisis" (with a later 2005 update) identifies the inflow of capital into the housing markets - in its infancy. The rest of the book rests on a rather halfhearted, unsuccesful effort of trying to combine Keynesianism and the Austrian School, but he does get that and other points exactly right.


Anyway, Denninger's been writing some good articles as of recent, and he takes on the current bubble blowing.

Bernanke: I Am An Ass And A Looter


jmc8888's picture

Be careful with empiricism, it has a huge problem at its base, potentially rendering the findings moot.

NOT saying, THIS is the case HERE.  But just like statistics, you have to know what it DOES TELL, you as well as the much bigger WHAT IT DOES NOT.  In other words you have to make sure you use it right.  SO whenever using empiricism, understand the following

"Radical Empiricism: The Epistemological Pretext for Re-Sculpting Reality

As we have established in previous articles, most of contemporary science is predicated upon empiricism. This is the epistemological stance that all knowledge is derived exclusively through the senses. Lyndon LaRouche explains the inherent flaws of empiricism:

By the nature of our processes of sense-perception, our direct perception of the world "outside our skins" (so to speak) does not show us that world "outside our skins," but, rather, the impact of that unperceived real world upon the biology of our mental-sensory processes. In other words, the shadows on the wall of Plato's Cave (LaRouche).

Thus, the world becomes little more than an ever-shifting pliancy of impressions. All that a percipient surveys is an amorphous amalgam of "shadows." It comes as little surprise that an exclusively empirical approach relegates causality to the realm of metaphysical fantasy. The obviation of causality holds enormous ramifications for science.

What is perceived as A causing B could be merely a consequence of circumstantial juxtaposition. Although temporal succession and spatial proximity are axiomatic, causal connection is not. Affirmation of causal relationships is impossible. Given the absence of causality, all of a scientist's findings must be taken upon faith. Ironically, science relies on the affirmation of such cause and effect relationships. This is all one can deduce while working under the paradigm of radical empiricism. Thus, the elite merely exchanged one form of mysticism for another. It comes as little surprise that, within certain occult circles, contemporary science is considered sorcery disseminated on the popular level. For instance, Satanic high priest Anton LaVey regarded science and technology as "sanctioned, but ineffectual 'occultism'" (Raschke, 214).

In fact, science has become a new form of sorcery for the manipulation of matter. According to the epistemology of empiricism, reality is little more than a quagmire of impressions. It is analogous to a holograph, the fabric of which is pliable enough to be manipulated. Thus, reality becomes the ever-shifting canvas upon which scientists paint whatever they wish. The scientist's role in this reconfiguration of reality was delineated in an esoteric tract entitled The Way of Light. Authored by Comenius in 1668, the manifesto was dedicated to the British Royal Society. Researcher Michael Hoffman elaborates:

In it, Comenius addressed the first formal scientists as "illuminati" and outlined their scientific purpose, "…which is to secure…the empire of the human mind over matter" [emphasis added] (Hoffman, 23).

Years later, Bertrand Russell would recapitulate the "illuminati's" (i.e., scientists') role in the establishment of "the empire of the human mind over matter." Redefining science as an instrument of radical empiricism, Russell wrote:

The way in which science arrives at its beliefs is quite different from that of medieval theology. Experience has shown that it is dangerous to start from general principles and proceed deductively, both because the principles may be untrue and because the reasoning based upon them may be fallacious. Science starts, not from large assumptions, but from particular facts discovered by observation or experiment. From a number of such facts a general rule is arrived at, of which, if it is true, the facts in question are instances… Science thus encourages abandonment of the search for absolute truth, which belongs to any theory that can be successfully employed in inventions or in predicting the future. "Technical" truth is a matter of degree: a theory from which more successful inventions and predictions spring is truer than one which gives rise to fewer. "Knowledge" ceases to be a mental mirror of the universe, and becomes merely a practical tool in the manipulation of matter [emphasis added] (Russell, 13 - 15).

In other words, science or "knowledge" becomes the instrument by which the "illuminati" re-sculpts reality. It also becomes an epistemological weapon against the minds of men, wielded by the proverbial Descartean "evil demon." This was the central precept of Weishaupt's Illuminati and the conceit of the Technocracy today: God was not in the beginning, but evolved from Man in the end. According to this conceit, Man could recreate Eden without the God. It comes as little surprise that sci-fi predictive programmer and British intelligence asset Arthur C. Clarke commented: "Any sufficiently advanced technology is indistinguishable from magic."


So while it may or may not have things to do with illuminati, or Queen of England, or TPTB, it sure can lead a bunch of dumbasses to do stupid things, regardless of a conspiracy.  Either way, for whatever reason, it doesn't change the fact, that empiricism, can give you just as bad of data as some market sophistry saying house prices will run up forever

It's also no wonder why some people want 'term limits'.  Because all we really need to get good candidates isn't to demand better candidates for real reasons, but just cycle more through the system.  Sophistry.  Empiricism.  Failure. 

Implicit simplicit's picture

I think the article would agree with you that the attempt by economists to use scientific tools like the bell curve to define markets is useless.

 Economics is not a science, it just tries to use science as a tool, often to it's detriment

doolittlegeorge's picture

great stuff.  "numbers have meaning, too and one can never underestimate the simple power of observation."  and is there anything more observable than humans?  some of us are on tv whether we want to be or not.  that ain't free and that ain't right.

Bob's picture

Very true! 

My model had me betting that you were gonna say that . . . but I sure felt better when I actually saw it on live video! ;)

doolittlegeorge's picture

i love a party.  come on over and chat some time.  "I'm in my prime" as they say.

Implicit simplicit's picture

Well, that was a brain full. I wish I understood all the math.

My take.The market is not composed of simple two dimensional events that can be explained by bell curves. As Taleb mentions, the market should  not measured and defined as mediocristan, as you would measure height or weight. The range of mediocristan events are more easily definable and follow bell curve probabilities.

The market is extremists because of its instability; like the grains of sand piling on top of one another mentioned in the article. One doesn't know which grain will cause the collapse- inflection point, but it is inevitable.

Presently, there are many market measurements, volume, rsi, ecri readings, currency deval., debt tthat point to a bubble crash. The only factor opposing it is the herd mentality of bubble creation, which actually is the final condition prior to the outlier event. 

doolittlegeorge's picture

numbers exist to mask the value of things, too.  isn't the cornerstone of "value" to "get that valuable thing for next to nothing"?  a growth guy like myself won't go there in a market in the sense that "if it has value it is more than likely already expensive.'' the question is much simpler therefore:  are you going to pay for it?  we are angry at the government because "they pay for things."  Why?

Highrev's picture

wrong place. sorry.




AnonymousMonetarist's picture

'Make the lie big, make it simple, keep saying it, and eventually they will believe it.'
-Adolph Hitler

'There are a lot of people who lie and get away with it, and that's just a fact.'
-Donald Rumsfeld

'Repetition does not transform a lie into a truth.'
-Franklin D. Roosevelt

'During times of universal deceit, telling the truth becomes a revolutionary act. Political language. . . is designed to make lies sound truthful.'
-George Orwell

'The first casualty of war is not truth, but perspective. Once that's gone, truth, like compassion, reason, and all the other virtues, wanders around like a wounded orphan.'
- Ente Grillenhaft

'The 1st panacea of a mismanaged nation is inflation of the currency; the 2nd is war. Both bring a temporary prosperity; a permanent ruin.'
-Ernest Hemingway

'I just want you to know that, when we talk about war, we're really talking about peace.'
-George W. Bush

"We're not going to monetize the debt."
-Ben Bernanke

'We are never deceived; we deceive ourselves.'
-Johann Wolfgang von Goethe

Left the Cubs game at the earliest point, (fourth inning - they were being clubbed by the Cardinals), that this fella has ever remembered abdicating his first row seat. But stayed long enough to listen (covertly) to a group of VIPs discuss their plans on renovating Wrigley, how the ivy was loosely covered under the declarations of the National Registry, how any modifications would need to keep up the appearance that things really hadn't been changed much, and how perceptions needed to be handled both in Washington and Clark & Addison whilst maximizing revenue.

True profanity to the ears of a worshiper at the shrine of futility.

And also a fractal writ large of the daily Vaudevillian interplay of the comics (WSJ and FT). Verily, 'tis a war against the future.

The dividing lines have been drawn, on one side are the Naysaying Nabobs of Nancy Capitalism that, with beige books extended, are unwavering in their dogma that Chairman Ben will perpetually liquefy their chalice of confidence, and on the other side are the few the proud, the misfits... the Atticus Finchs that believe that reality is the tail risk. With arms extended they proclaim : We are not idealists to believe firmly in the integrity of our economic system. That’s no ideal to us. That is a living, working reality! Now we are confident that you Mr. Market will review without passion the evidence that you have heard, come to a decision, and will uh, uh, well, uh ...

Then they stop and scratch their head and say ... the government is all in isn't it?

The Office of Economic Influence headed by the Oracle at Eccles like all progenitors of psych ops has to, by necessity, weigh whether the harm done through their deception offsets the good that same, purportedly, will accomplish.

Continual disinformation can result in damaging blowback, and most certainly the denouement of the trusted is a high-priority target to be avoided lest the surplus eaters start to believe their lyin' ojos and reject the Divine Might of Wizards.

As Napolean once opined : 'There are but two powers in the world, the sword and the mind. In the long run the sword is always beaten by the mind.' The horsehair splintering for the Federales cum Svengalis is to negate the cycles and learn from the historical chestnut that in 1929 the top 1% of households represented 44.2% of wealth and in 1933 they represented 33.3%.

Psychological operations are planned operations to convey selected information and indicators to audiences in order to influence their emotions, motives, objective reasoning, and ultimately their behavior.

If inflation expectations are unanchored, then a severe recession can lead to a deflationary spiral. The logic is as follows: In the early stage of recession, the emergence of slack causes the inflation rate to dip. The resulting lower inflation rate prompts people to reduce their future inflation expectations. Continued economic slack causes the inflation rate to fall still further. If the recession is severe and long enough, this process eventually will cause prices to fall and then spiral lower and lower, resulting in ever-faster deflation rates.

And much like 'modifying' the ivy on the walls at Wrigley deflation is true profanity to the ears of a worshiper at the shrine of liquidity.

The struggle of virtue and vice is writ large as the debate between deflationistas and debasinistas. Ones' lens depends on what one means by ones' ends. The deflationistias mean that deflation is the midwife of hyperinflation. The debasinistas pray that familiarity breeds content and not contempt.

So tell me Morpheus how can they camouflage debasement in a no-stimulus zeitgeist?

Friday's King Report:

'The Fed did a major juicing of the system by adding $11.059B for the week ending on Wednesday. More importantly, the Fed’s balance lost only $361m of MBS. It’s inconceivable that the Fed received $10+B of interest or principal prepayments on its $1.09 trillion of MBS in one week.

The Fed monetized $10.461B of Treasuries. The NY Fed has done $20.887B of POMOs, which are Treasury monetizations. There is a POMO scheduled for today as well as Tuesday and Thursday of next week. (http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1&oper...)

The size of POMOs has increased the past two weeks. So the Fed is on pace to monetize $30+B of Treasuries for September. This is almost a 34% yield on its $1.09 trillion MBS portfolio – less the amount of principal repayments, which we don’t know because the Fed won’t tell anyone.(http://www.newyorkfed.org/markets/agency_agencymbs_faq.html)

The latest H.4.1 shows the Fed is monetizing Treasuries far in excess of the decline in MBS value. We’d love to see proof that principal repayments and interest in 1 year can be 34% of a MBS portfolio. Ergo, the Fed is monetizing Treasuries far in excess of its stated monetization of MBS interest and principal prepayments. The Fed has increased its QE 1.0 activity.

As we keep screaming, QE 1.0 has not ended despite official proclamation that it had. The bottom line is Bernanke and the Fed have been lying about the scope and nature of it - QE/debt monetization.'

Thanks for the Red pill Mr. King.

Damn dirty apes.

It's a madhouse.

Traianus Augustus's picture

Thank you for putting numbers behind my initial reaction to the Fed only using proceeds from MBS interest/principal payments.  Lies, more lies and damn lies!!!  How anyone even remotely involved with the markets these days can possible believe that the FR is not strangling America with their QE policies is beyond me. 

doolittlegeorge's picture

never a more poetic expression of the Zero Hedge mantra.  You seem very certain of its inevitibility as well.

steve from virginia's picture

Sornette may or may not be onto something (that Minsky was also onto).

QE may or may not amount to anything as it represents a) an asset swap creating no new value (which the Fed cannot create) and b) operates within the context of liquidity/currency traps.

QE effects are constrained by dollar energy costs which effect the real economy - that is, the economy that you and I live in. $80 oil bankrupts all including Bernanke.

In a few months(?) $75 oil will bankrupt all, then $65 oil, then $55 oil. The world gets poorer by the day and nothing that Bernanke can do can end this dynamic. Our 'wealth' is a representation of heedless waste - autos, tract houses, giant 'Blade Runner' cities filled with energy- gobbling buildings, energy- dependent agriculture, and a culture that cannot accept any alternatives. We are trapped, we are bankrupting ourselves and QE changes nothing.

Cheater5's picture

"According the rational expectation model"


Grrrr.  Would someone please finally put a knife into the heart of the Rational Expectations model then cover in in garlic, sprinkle silver dust over it, chop it into tiny pieces, burn it with naplam and then launch the ashes into the sun.....  Rational Expectation (in my humble opinion) was nothing more than a grossly invalid assumption used math geeks, who had turned themselves into economists in order to secure "gainful" employment, to justify their academic masturbation known as research.  The expression "physics envy" often comes to mind when I see academic papers written by economists which use Rational Expectations to justify a level of precision appropriate to Newtonian Physics.  Ladies and gentlemen now for the big surprise ..... "The Herd" often acts irrationally and in a non-linear fashion. 

I'm gonna read this whole thing (eventually) because I am curious enough about econphysics concepts (particularly when they relate to non-Newtonian particle physics concepts) to believe that some of them just may have merit.


Thanks Tyler for the article.

boogey_bank's picture

Reading that very interesting analysis, my attention fell on the page 85 graph, about the price of 100 oz future gold contract in ln scale.

We can see the 1979 bubble phase that ended with the gold peak in early 1980 at circa 6.744 ln value. Sudden follow the multiyear bear market with gold at 5.562 (ln) in 1982.

The bubble phase lasted for circa 6.36 months beginning in middle 1979.

In that period we can see a 1.052 gain in nat. log. value.

If we rewind from today a 6.36 months in the past we find gold at circa 1,109 dollars.

So, using this metric, for gold being in a bubble (with an impending multiyear correction) (and apart from other considerations about the severity of the actual crisis) we should have a gold fixing around the 3175 dollars level.


doolittlegeorge's picture

here's your answer mr. "i don't like the idea of rational economic theory."  damn humans and their friggin need to add and subtract things....pretty soon they'll figure out a way to build a "space ship" and "land a man on the moon."  yeah, right.  like that 'll ever happen.

New_Meat's picture

This is 2003 paper-wonder how the predictions have panned out?

- Ned