Pimco's Richard Clarida Explains The Schizophrenic "Risk On, Risk Off" Market

Tyler Durden's picture

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pyite's picture

I think it was Robert Rubin who said that quote.  </nitpick>


snowball777's picture

Does this work off of growth in domestic demand in China, or belief that there'll be someone to whom they can export products in a year?

trav7777's picture

And I'm sure he was very bullish on Enron too.

Lemme ask these people something, these china bulls...do you have ANY visibility whatsoever into the Chinese banks?  Chinese companies?  Do you have any accounting statements?  Any transparency?

So why the fuck would you believe the same talking head idiots who were saying to buy the Qs at 5000 and who said LEH was a buy, and all the rest of this shit?

What PIMPCO is saying in the article is that they have modeled all their "strategies" after distribution curves where they make assumptions about the probable distribution of events.

I have said on this forum many times that the economists are now all clueless, they are like a fish out of their tank, or I have analogized that they are a navigator using a compass after the magnetic poles have flipped telling us we are going east as we fly into the setting sun.

The world has very CLEARLY met a significant epoch where we transition from the 400 year trend of growth to a trend of contraction of uncertain duration.  The Growth Era was longer than any of our lifetimes, so long as to seem permanent and immutable by humans just as surely as the Grand Canyon or the Hawaiian Islands, despite both of those being babies in geological time.

Everything the economists do revolves around an assumption of how to attenuate or modulate growth.  They do not know what to do about contraction.  Everything they try seems to fail because the world has changed.  This is what is so confusing.  The PIMPCO guy is trying to rationalize with all this "fat tail" shit because he is desperate to make sense of the data he is seeing.  The problem is that every piece of training he has is now irrelevant.

A big fat tail and wide sigma and all of this is telling you in mathspeak that the outcome is becoming highly random, that the distribution is becoming more uniform.  Consequently, investment managers' math modeling and their entire profession essentially becomes obsolete.

ABeautifulMind's picture

Amen.  Dinosaurs with broken tools.  Our kids have a better shot at understanding the world we live in then these guys do.


Clayton Bigsby's picture

great post!  I can't say I totally agree because I think the tools that guys like Clarida uses are adaptable, if they're approached with an open mind, but I really liked the logic of what you had to say and agree that there is a certain modality of thought re. the investment markets that I'm sure will have to be reappraised

DR's picture

We are at the end of The Great Age – the modern economic era that stretches back three hundred years and encompasses the European Enlightenment, the Industrial Revolution, and the lives of all the classical and orthodox economists from Adam Smith, David Ricardo and Karl Marx, to Irving Fisher and Franco Modigliani.

The outstanding feature of this Great Age was an explosive population growth never before observed in human history and perhaps never to be seen again.

  • From the birth of Christ to the mid-eighteenth century, mankind expanded less than one-tenth of one percent per year.
  • In the three centuries from 1100 to 1400, population grew only twenty percent. From 1400 to 1700, the human count did not even double – increasing just seventy percent.
  • However, in the three centuries from 1700 to 2000 – the Great Age – the number of people expanded tenfold!

All of what we know as economic theory has been postulated and developed in an environment of constantly increasing population.

Not only did the number of men and women increase substantially each year since Adam Smith was born, but the population of the monetary economy grew even faster.

dhfry@yahoo.com's picture

Interesting if I knew what he means by "the tails" which I only know from retail sales experiences. I'm not shy about asking what the hell it means even if I paint myself as an old fart.

trav7777's picture

visualize a bell curve.  The tails are the little parts that go out to the right and the left edges of the curve.  What these mean is the few number of low probability outcomes.

a "fat tail" means that the probability of those outcomes is higher than would be expected given a standard gaussian distribution.

For example with IQ, you see a bell-shaped distribution.  Most people have IQs near the mean and statistically few people are out at the very high or very low end.  It's not like throwing dice where a 6 has the same odds as a 1.  In normal distributions, the odds of a high disparity from mean are much much lower than a low disparity.  The same is true with average height.

scratch_and_sniff's picture

I have a fat tail...I only use it on low probabiity events though.

Cognitive Dissonance's picture

Risk On, Risk Off.

Sounds innocent enough. Like that movie, wax on, wax off. Or many a pulse generator or vibrator working at a low frequency. Nice and respectable, even soothing.

Over the last 3 months, the number of 90/10 days up or down (meaning 90% of the market flow is either sales or buys and only 10% is on the other side) has accelerated at an alarming rate. I count at least 17 that fit that bill and maybe more. This is a sign of increasing frenzy and indecision, of panic either to get in before it's too late to feed or to get our before the world ends in a bang. This is a sign of underlying fear, not of confidence.

Most engineers are familiar with the effects certain vibrations have on structures, how sympathy or resonant vibrations can occur for whatever reason with increasing frequency until suddenly the structure suffers a massive weakening, leading to a partial or total collapse. Brings to mind the Tacoma Narrows Bridge, of which nearly everyone has seen the video of.

The Tacoma Bridge swaying started small, gently even. But over a few hours, the rocking back and forth steadily increased until a resonance frequency was reached between the sway, the wind and the natural vibration of the bridge itself. It came apart very quickly after that. Anyone looking at that bridge would not have been considered crazy if they postulated that it looked like it was going to collapse.

Why are so many people saying exactly the opposite regarding our markets? These massive swings up and down are not normal and not healthy. And yet we're told it's just a little vibration on the road to recovery. We would all be served well if we watched the video of the Tacoma Narrows Bridge one more time.



Cognitive Dissonance's picture

Free will is what's making the bridge/market swing. Or free will as embodied by HFT computer algorithms.

trav7777's picture

made the same observation awhile ago, when the nasdaq was doing these wild oscillations.  Was the time to GTFO if you're long.  saw it in some individual stocks and seemed to always be a sell signal.

primefool's picture

Good article. The fatter tails also have another implication: You need deep pockets to play. You need to be able to withstand big swings. Helps if Timmy has your back in this trading environment.
Or - maybe this trading environment is designed to shake out everyone who does not have access to deep pockets - or Bennie's magic money machine.
Clearly many stocks look enticing relative to Zero returns in cash. They probably will be great longer term - but have to be willing to withstand the 20-30% drawdown in order to play. So who's gonna play? Not the mom/pop watching every penny and saying there goes my lunch money - no sir. The goodies aint for them - only for the big boys.

williambanzai7's picture

Better to study the behavior of schools of fish.

Cognitive Dissonance's picture


I was actually studying this a few weeks ago and what I found was amazing. It seems that the rate at which the fish (that were studied) changed their direction of travel was faster that the brains of the fish worked. Somehow the fish were recognizing the groups change and adjusting to the group quicker than their brains functioned when conducting all other individual tasks.

In effect, the fish were reacting faster than they could "think" or process the brain stimulus to move. Similar to saying something moves faster than light. The conclusion was that the "school" of fish were acting as one rather than as individuals. They couldn't explain how.

pong's picture

Interesting study, CD-- happen to have a copy or the title of the study?

I'm an electrical engineer-- and I have seen first-hand what happens when certain oscillations occur-- Many of the North-Eastern electrical power outages were caused by oscillation events as well (as a side note, this is why I'm glad TX only interconnects via HVDC with our neighbors).

RE your post on 90/10 flow days: What data are you using to measure?  Trades executed at the bid/ask netted out as a percentage of volume?

Wyndtunnel's picture

So much analysis when what he is trying to say is:

You got to know when to hold 'em, know when to fold 'em
Know when to walk away and know when to run
You never count your money when you're sittin' at the table
There'll be time enough for countin' when the dealing's done

Every gambler knows that the secret to survivin'
Is knowin' what to throw away and knowing what to keep
'Cause every hand's a winner and every hand's a loser
And the best that you can hope for is to die in your sleep

Geoff-UK's picture

"You can't lose if you don't play."  --The Wire, episode 2