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I did that once. Good times.
The new normal is a trend toward cycles of increasing amplitude and frequency. Bubble tops followed by cataclysmic crashes and V-shaped "recoveries". In retrospect the crash of 1987 and S&L crisis were a dress rehearsal. Dramamine is a buy.
"It is sometimes an appropriate response to reality to go insane."
— Philip K. Dick
Off Topic, but it is my belief that eventually, PK Dick will be recognized as one of the greatest writers of the last half century.
Interesting question to examine, but your methodology is flawed. For one thing, you can't interpret the magnitude of a t-stat as explanatory power. Second, I strongly doubt that your series is stationary, so estimating the non-differenced equation is going to give you spurious results -- thus your high R^2. Third, you probably have a simultaneity problem going on -- your risk-free rate is probably jointly determined with the VIX.
The third problem is hard to get around. For the first two, test for a unit root in the variables and if one of them is I(1) take the first difference for all three variables, rerun your regression, and see if changes in VIX Granger cause changes in Baa spreads in the three time periods. Not particularly strong evidence, if so, but interesting nevertheless. If I had to take a wild guess, I'd say that you're on to something; changes in VIX probably DO Granger cause changes in Baa spreads in the 2006-2009 period, but not in the first two.
Hey. Great points.
On the regression fit... the reason why the fit is so good... the high R^2 is due to the inclusion of AAA spreads. To me, VIX and AAA are the extremes that drive the Baa dynamics. I have no love for ratings, but I had to make do. So take your third point as meaning multicollinearity and accept the criticism.
I actually tested for cointegration, but found it very difficult to explain its import in a paragraph. It was easier to explain a correlation function. Concision is an imperative.
Anyway, cointegration was tested using Stock-Watson on a I(1) of the processes. I found evidence of a common trend between VIX and Baa spreads in 2006-2010 and 2000-2005.
I found evidence of a cointegrating vector between AAA and Baa only in 1990-1999, rejecting in other time periods.
I've wondered to myself if these time intervals are arbitrary and equivalent to censorship.
Hmm, interesting. Thanks for the clarification on your results. I agree, too, that explaining cointegration is a big headache; a correlation function probably gets the point across just as well.
IMO the whole sub-specialization of time series is so fraught with problems as to be almost meaningless, perhaps excepting spectral analysis and some non-parametric stuff on large numbers of observations. Kinda hard to avoid in finance, though. Anyway, I enjoy your posts... keep it up.
This kind of dialogue is why I read Zero Hedge. At a min, I get to practice pronunciating big SAT words.
pronunciating? jeeez, where's the coffee......stuck in spanglish mode again.....
FYI... Johansen on the closing VIX and Baa spreads:
Portmanteau Test for Cross
Correlations of Residuals
Up To
Lag DF Chi-Square Pr > ChiSq
3 4 89.10 <.0001
4 8 111.55 <.0001
5 12 113.21 <.0001
6 16 125.88 <.0001
7 20 151.13 <.0001
8 24 159.17 <.0001
9 28 175.96 <.0001
10 32 210.54 <.0001
11 36 218.33 <.0001
12 40 221.66 <.0001
I recommend to read analysis prepreared by Bank for International Settlements. Conclusions + link to full analysis available here: http://www.pro-investory.cz/investice_aktualni_analyza/jak_to_vidi_bis_v...
I read the conclusion and agree that the demographics mean entitlement reduction is the key to fixing the crises.
But I think the problem is so much worse than it appears on the surface. The act of austerity itself could trigger adverse events if it is taken as a sign that the emperor really has no clothes. Every day the eventual necessity of dealing with problems is delayed, the more likely that dealing will mean meltdown.
that falls looks a weeeee bit farther than 6 feets down
"The endgame the US lives within its means, or US T-bills get hammered"
Since we know the US will NOT live within its means, then T-bills will get hammered. And if T-bills get hammered, that means all sovereign debts get hammered and horrors will have ensued in equities.
The Fed and Treasury can only do so much, until they lose control. They cannot make the US live within its means.
Nobody knows that for sure, eh?
There is no excuse for the madness of elected stooges. But reason may yet prevail.
You never know what a collective of people can do when their back is clearly against the wall. Look back to the Civil War and the greeback era. Much worse QE and fiscal shape than we are in now, although there is more govt intrusion in everything right now. They made it through.
What a piece of work is man. In survival like a cockroach, in action like an angel, in apprehension how filled with hubris.
The problem is that our backs are nowhere near against the wall. Sure, some people have been suffering--too many, don't get me wrong--but not the right sorts of people. Then United States will absolutely do the right thing, make the tough choices, only when the last easy alternative has been stripped away.
The American political class has had the luxury of kicking the can down the road because it could. We have had what De Gaulle called "the exorbitant privilege" of creating money out of nothing and foisting it on a world obliged by precedent, for yet a while, to accept it as the global standard of intermediation. As a result no ridiculous program, no costly war, no intergenerational promise was too excessive, too extravagant for our lawmakers to resist--we could always just whip out the national checkbook, print up a few hundreds of billions (on or off-budget) and put it on the tab for somebody else to worry about some other day; such arrogance and fecklessness cannot go unpunished, and it will not.
But what happens when that changes? What happens when the dollar becomes just another currency? We cannot even imagine the consequences.
Zero Hedge has provided an amazing forum for non-financial specialists, or even some who do have some grounding in this discipline, to get the non-traditional education of their lives. One example: Tyler has posted over the past couple of days the observation that the U.S. Treasury has redeemed over 600 billion in bills and notes in one month; the worrisome implication being that at some point in perhaps the near future the U.S. will fail to refinance and all hell will break loose, with unknowable consequences for all of us. One does not have to be a particle physicist to infer that the failure of an auction could lead, quite directly, to the collapse of the dollar as the reserve currency and this alone would quickly transport all of us--including the all-but-unconscious political leadership of this once-great Republic where "they do not want to go."
As the dollar collapses, the bond market will be crushed; yields will skyrocket, markets will implode, and all and sundry (excepting those who read ZH) will be looking around and at each other asking "how on earth did this happen" and "who do we blame?" When unemployment is at 30%, when inflation is at 20% and gasoline is at $6 per gallon and Social Security and Medicare recipients are ambushing their Congressional representatives (remember Dan Rostenkowski?) and there is no room in any shelter for homeless men--women and children only!--and the National Guard is manning food distribution points in major urban areas and the Legions have been recalled from the vast corners of the American Empire since they can no longer be supported--do I need to go on?--then and only then will our backs will truly be against the wall and the American people will demand the the truth, demand respectable government and the honest money that underpins it.
They will demand America back, and, thank God, they will get it.
GOD...JUST...
KEEP THAT FUCKING MOUSE AWAY FROM ME!!!!!
AAAAAAIGHHHHHHHHHHHHHHHHHHH!!!
Hang on dude!
Thorazine is on the way!
Nah... just let him taste the music and feel the colors.
peace..
http://www.youtube.com/watch?v=HCeWat8zx18
JM, another quality post & you reply to your commentors. Such courtesy I don't expect as the "new normal." That said, I've seen many charts of the ideas you're laying out re boom & bust cycles. They are quite visible to see as the FED changed its role(s) after the 1980's. Each bubble will vary from the previous one, but as they go on, they're more out of control as the driver becomes increasing intoxicated.
I would point you here: http://www.er.ethz.ch/fco/ for some serious thoughts on bubbles & building models to track them. Check out the Chinese Equity report. They were very close, close enough, in calling the correctives top to the waterfall decline.
Sadly, the American school of deep captured economists will never see anything thru the windshield; they only look back in the rear view mirror.
Fractals, JM, think fractals...
That website is associated with Sornette... a real quant super-star. He's done something very brash... trying to prove that the future can be predicted.
He built a model and put the findings in a locked a safe somewhere. On a specified date, the safe will be opened by an independent reviewer and his forecasts will be compared to reality. I think the safe is opened in June.
Takes a lot of guts to put one's reputation (and lots of grant money) on the line like that.
"Men of genius are meteors, intended to burn to light their century."
Napoleon
Thanks for that link. Hott daymn!
I think you'll enjoy the studies. The preliminary results of their research will be likely released this week as they stated a May 1st release date:
http://arxiv.org/PS_cache/arxiv/pdf/0911/0911.0454v3.pdf
The link for the findings is at:
http://arxiv.org/archive/q-fin
When they come out. His protocol appears to be impeccable to prevent any leaks ahead of time.
HUH!? WTF...... can the writer and some of the commentators dumb it down a little..... and include me too.... never forget socrates: "I know that I am intelligent, because I know that I know nothing."
Caviar Emptor stated the idea very well. Bigger booms and busts that affect more assets than just stocks. Bonds and even some government credits are being pulled into the liquidation cycles. Government backstops means that safe assets are increasingly unsafe.
You could also say that every asset is in a bubble to some degree pretty much at all times, except for a few scary monents.
"Everything is getting more synchronized to VIX" is easy to say, but to demonstrate it more complicated. I tried to do that.
Good read JM thank you for your efforts.
I would like to point out that while I agree wholeheartedly that most asset classes seem to be in some sort of bubble to some degree or another, food is in a world of its own. There is almost undoubtedly a major disaster looming on the horizon due to decoupling of the financial economy from real economy. I feel like the magnification of amplitude and volatility will only end once we reach this event. A rat will choose cocaine over food until it starves to death. Enjoy the trip and thanks again!
I will agree with you and offer my pick for "the straw". The article does not mention it, but I think that the cause is cell phone towers.
Fears for crops as shock figures from America show scale of bee catastrophe:http://www.guardian.co.uk/environment/2010/may/02/food-fear-mystery-beeh...
I think I can simplify it even further: We're screwed.
My eyes have now become uncrossed. Thanks for the translation.
There goes the neighborhood.
DOW chart shows an expanding wedge indicating a significant move is probable.
MARKET UPDATES:
http://www.zerohedge.com/forum/latest-market-outlook-0
ROFL If we wanted to live within our means, we'd have to INCREASE our spending. We haven't had the ability to 'live within' our 'capable means' because of monetarism by a very wide margin.
So what happens when the SYSTEM makes 'living within our means' impossible? Throw the system out.
The problem is monetarism, and it's inherent flaws. But then again, if you don't realize Adam Smith based his whole free trade on sophistry (i.e. bullshit), you don't understand that Adam Smith was full of ****.
If you don't understand that, there is no way in hell you can understand WHY America is now bending over backwards to 'not meet' the needs of its people, and to 'live within it's means', except at this point, we're just robbing peter (the american public) to pay paul (the monetarist banksters).
It's the monetarism game that is crushing our budgets. Budget deficits are the symptom. The problem IS monetarism. Monetarism CAUSES deficits.
You want to get rid of budget deficits so badly? End Monetarism.
So we can 'live within our means', whatever that means. Oh I know, it's what the bankers say you can afford to (because they haven't stolen it yet), and then they lever up 100x around it to make sure it's consistently less, and less, and less.
America because of monetarism has had a harder and harder time of meeting the needs of its people, only because of it.
Now the monetarists say 'live within your means', 'or else'. How about monetarism not CREATE the problems the nation/states face? How about monetarism not crush every business and sovereign nation/state that uses it? How about we let the bets fail? How about wiping out all the crap that cannot pass a glass/steagall standard?...and do it worldwide!
Otherwise we will continue to see the broken system tell bankers to tell us that we can't afford anything. It's because it's THEIR SYSTEM idiots.
Everything must be put through a global glass/steagall standard, that which doesn't pass, doesn't exist. Monetarism must end.
Don't worry, you CAN have capitalism without monetarism. But what we have is straight monetarism, not capitalism.
Remember, the crux of Adam Smith was a lie, and if you can't spot the bs sophistry, you truly shouldn't even have a high school diploma accredited to you.
Here's a nice little roundup from larouche on the fallacy or folly of Adam Smith.
http://www.larouchepac.com/node/14344
Read that and realize what we're facing is one helluva problem. We have the entire world linked together in one giant sham that when it pops, will take the whole world down with it. But as you can see, it was truly, THEIR faults. Not Greece's, Not the PIIGS nations, not the U.S., but squarely on Britain. The world uses THEIR monetary system.
Then realize they're committing the same kind of bs with global warming/cap and trade. All by the same group of people, with commingling interests.
http://www.larouchepac.com/node/14331
Of course you might disagree, but what about this and the GM payback tarp fraud?
http://www.larouchepac.com/node/14318
This is how republicans should of treated Bush, and this democrat is doing this to Obama (and has been), because it's the truth.
The new normal? In this new era of monetarism disintegration, these are the good ol' days. Enjoy them while they last. If it ever was a situation in which you could.
Finally remember, it isn't the eurozone that is disintegrating, it's the British Empire.
http://www.larouchepac.com/node/14335
http://www.larouchepac.com/node/14336