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SocGen's Dylan Grice Reconciles Micro And Macro Decision-Making

Tyler Durden's picture




 

Dylan Grice is out with his latest must read analysis, in which the SocGen strategist attempts to reconcile the seemingly intractable: bottoms up, or micro analysis and its polar opposite - top down, macro decision making. In doing so, he does a brilliant detour into the realm of what some may call Talebian philosophy, by evaluating the impact of non-Gaussian phenomena, such as grey and black swans, which, after the past two years, everyone has learned occur far more often than expected, as we all now live in (Socialist) Extremistan. And in a world, where fat tails can occur any day (May 6), how does one hedge, regardless of marco or micro opinions? At the end of the day, one of the messages of Grice is that as we all perceive ourselves as much better traders, thinkers and predictors than we are in reality, should we not just stop trading altogether and focus on actual productive labor? One favorable side-effect would be starving the TBTF beast, which everyone complains about, yet most continue to play according to its rules. If this is too drastic, Dylan suggests that every micro analyst/trader should always be familiar and at least aware with the catastrophe situation, which is always best represented by keeping the macro picture in mind: "Perhaps we should embrace our limitations by accepting that ‘outlier events’ are actually quite regular, and use macro research to aid in the search for appropriate insurance strategies." Must read.

What?s the point of macro?

 

Dylan Grice June 22

 

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Tue, 06/22/2010 - 15:51 | 427500 Teaser
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Selling derivatives again.  Can you say counterparty risk?

Tue, 06/22/2010 - 15:58 | 427521 bull-market_3.0
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Very good article. I wish he offered some ways for retail investors to profit from those black and grey swans though. 

All in all, definitely a solid article. 

+1

Tue, 06/22/2010 - 15:59 | 427523 Mikebrah
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This fucking Waldorf Astoria advertisement is killing me.  Anyone else getting this shit?

Tue, 06/22/2010 - 16:14 | 427543 Duuude
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Visit, great companions there...

Tue, 06/22/2010 - 16:13 | 427564 Tyler Durden
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Or maybe click on it. Zero Hedge, despite our application, does not have access to the discount window, nor is a primary dealer... yet.

Tue, 06/22/2010 - 17:12 | 427737 vs18
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I am very glad ZH is Bberry optimized but is there a way that I can login from my bberry and post comments? I read ZH 70-30 off my phone vs computer... for obvious reasons. Bold 9700 for reference.

Tue, 06/22/2010 - 21:53 | 428313 drwells
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Good point, I'm donating some fiat now.

As far as ads, I highly recommend NoScript (http://download.cnet.com/NoScript/3000-11745_4-10461464.html). I see no ads on ZH or almost anywhere else now, yet most sites continue to work just fine.

Mon, 07/04/2011 - 13:45 | 1424680 suedallin
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Si vous lisez le court The Big "par Lewis, vous verriez que l'effondrement a été dérivée d'un cygne noir pour la plupart, mais pas pour ceux qui pleinement prévu et ont été chargés avec les CDS. Check my guide and rent a villa online from my villas for rent collection.

Tue, 06/22/2010 - 17:09 | 427726 bluewarrior
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I get a bit confused when we talk about Swans......all the things that have been attributed as swans, if you actually look at them are events which were the expected result of a set of policies taken in the past.

By referring to Swans, I get the feeling of random low probability events...which I don't think is what we are getting in the financial markets. AIG was not a swan, nor was Lehman.

It was the natural result of the way the system was set up.

Tue, 06/22/2010 - 17:20 | 427755 Muir
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Man, that had nothing to do with Taleb's birds.

I suggest you re-read, that stuff was solid.

Tue, 06/22/2010 - 17:41 | 427818 Implicit simplicit
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This is because, as he mentions, hindsight is 20/20.

Sure, retrospectively "if you actually look at them are events which were the expected result of a set of policies taken in the past." but vey few were actually expecting it to happen, and this is what makes a stock market crash- the big un expected- the Black Swan.

It might not have been a black swan event for you, but it was for most. Taleb in his book "The Black Swan" gives the example of the trukey and the butcher. The turkey was fed everyday at the same time by the trusted feeder and did not expect what happened on Thanksgiving. It was a black swan event for the turkey but not for the butcher who fully expected the event.

If you read the The Big Short" by Lewis, you'd see that the derivative collapse was a black swan for most, but not for those who ful;ly expecgted it and were loaded with CDSs.

Tue, 06/22/2010 - 22:02 | 428323 drwells
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Taleb says the same thing. Many or even most swans are black only to people whose heads are screwed up their asses. His analogy is that if you build a shitty sandcastle, then keep dropping extra grains of sand on it until it collapses, you don't blame the grain of sand that causes the avalanche - you blame the shoddy construction of the sandcastle.

Wed, 06/23/2010 - 07:37 | 428661 mephisto
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I suggest you forget about swans. For anyone who understands that you can get these big critical points, with huge effects, from a sum of tiny causes, the concept isnt actually useful - and you seem to get that.

I wish smart analysts like the Socgen team would let the concept go too, but I guess it still sells.

Taleb is so 2008, time to move on.

Tue, 06/22/2010 - 17:17 | 427746 Muir
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TD thanks!

Brilliant, real nice read.

Tue, 06/22/2010 - 18:03 | 427861 Implicit simplicit
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Presently, from a simple subjective probability guess standpoint regarding the stock market, it would seem that their is about a 70% chance of at least a gray swan event every 2 weeks and a 30% chance of a black swan event within 1 month, 50% within 2 months and 70% within 3 months.

This is my reasoning for conviction shorts without stops, and gold and silver long.

 Losing alot of money thru shorts being squeezed on the "hidden" stop is a black swan event for many. However, it is fully expected by the market makers and HFT algos in the manipulated corrupt market. It would not suprise me if certain managers at Etrade, Ameritrade, Fidelity etc.. all supplied data regarding private account (who owns what, how much, where the stops are at etc...) so that the market could be front runned, squeezed and totally gamed for illegal profits.

The swans are going to carry the market down like the stork delivers new born, but quicker than 9 months  

Tue, 06/22/2010 - 21:46 | 428230 AccreditedEYE
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One nugget I enjoyed was him repeatedly being told buy and hold is dead. That's fantastic. They have successfully sapped the belief that equity investments are a long term store of value. (Which I would agree with, for now) When this pig crashes, the buying opportunities are going to be "once in a lifetime". It will be the single best time to really buy and hold. (you'll know it's time when you mention the word "stock" in public and get spit on. lol)

Tue, 06/22/2010 - 21:16 | 428263 williambanzai7
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Is Madhedgefundtrader staying at the Waldorf Astoria today?

Tue, 06/22/2010 - 21:29 | 428280 Budd Fox
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For unknown reasons...the Zero Hedge colophon superimposes on the document and I cannot reach the full screen controls. Tried to mail it to myself....half an hour ago..no luck.

Damn!

 

Wed, 06/29/2011 - 02:46 | 1410873 jimmight
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Nothing new. US fraud, banks fraud, Greek fraud, Spain fraud. Let's print a bit more and forget about it. Just the new normal routine.
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