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Guest Post: Instability Starts On The Margins
Submitted by Chales Hugh-Smith of OfTwoMinds blog,
What is the prudent response when hefty profits beg to be booked and assets purchased with leverage/debt start declining? Sell, sell, sell.
Many analysts have described the core-periphery dynamic: instability tends to manifest first in the periphery and then move inexorably to the core. Social and economic changes work in a similar fashion, originating on the margins of the economy/society and then gaining wider influence/acceptance once roughly 4% of the populace (a 64/4 Pareto Distribution) utilizes the innovation.
Everything from fashion fads to Internet useage follows this model of expansion from the margins to widespread acceptance.
Though we welcome this model of technology and fashion distribution, destabilizing financial crises tend to propagate in a similar way, from the margins/periphery to the core. For example, the "Asian contagion" crisis of 1997 began in Thailand, far from the core of the global economy. Once the crisis infected other Asian economies, it soon disrupted core economies.
In the same era, the losses experienced by one firm, Long-Term Capital Management (LCTM), ignited a financial firestorm that quickly spread to global capital markets.
How do we interpret India's brewing crises in currency devaluation (rupee) and inflation? The conventional view is that these are unique to India and therefore isolated. This was of course the conventional view of the Thai currency crisis of 1997--that it was unique to Thailand, and therefore of little concern to the rest of the global economy.
Financial crises spread not because conditions that triggered the crisis are universal, but because fear and loss of faith are universal emotions. What happens in financial crises is the initial disruption/instability causes participants to ask if risk is truly as low as advertised/assumed in the markets where they're exposed. Prudence demands lowering not just conventionally measured risk but potential risk and perceived risk, both of which may diverge radically from pre-crisis risk measured by various portfolio insurance methodologies.
In other words, potential and/or perceived risk triggers selling, which then raises the premiums on risk management. These indicators of risk then trigger a wider perception that risk is rising, which then unleashes more liquidation of assets. This prudent risk-management selling depresses prices, tripping margin calls, trading stops and thus more selling.
In a financial system that is heavily dependent on leverage, credit, phantom collateral and sky-high asset valuations, selling begets more selling, launching a self-reinforcing feedback dynamic in which selling leads to more selling that then triggers margin calls (i.e. selling assets that were purchased with borrowed money) and technical selling (i.e. selling when critical support levels are broken).
What is the prudent response when hefty profits beg to be booked and assets purchased with leverage/debt start declining? Sell, sell, sell, until the entire profit is booked and all at-risk debt is paid off. Anything less invites risk, loss and even insolvency if declines get away from those who purchased assets with leverage/debt.
Could India's currency/inflation crises spread to other nations? That is an open question, but what could easily spread is prudent doubts about the risks that are as yet unrecognized in other markets. If prudence demands selling first and asking questions later, risk is quickly repriced. That repricing itself triggers doubt, fear and a loss of faith in the supposedly permanent bull markets in bonds, real estate, stocks, 'roo bellies, quatloos, etc.
A financial sell-off doesn't even need a real crisis to spread like wildfire; it simply needs nosebleed asset valuations, excessive leverage/credit and risk priced at "the bull market is guaranteed to last essentially forever" levels. Prudence alone will ignite the conflagration.
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I guess it's time to get a check from the weather man.
See Madame Rouge -
She will cast the chicken bones -
Just for you! Long? Short? On the cell phones!
Dear Prudence, won't you come out to play hey hey?
http://www.youtube.com/watch?v=7ppmdvXsMBE
Central Banker software doesn't have fear and loss of faith. Although from what I've heard it does come with an appalling Bernanke joy stick.
Instability starts in Washington DC; then the crap, lies, and theft just roll downhill.
How about instability and booking profit$ in Caracas w/ the market up 300%? What if you came up with that theory and went short Caracas from say 30% up fwd? That's just a meatgrinder for short positions.
They have complete control. Don't go short, brethren.
The key is to go short at the correct time when the bottom drops out. Big boys know when this will happen and are waiting. Until then, your description is accurate.
BUT BUT BUT ITS DIFFERENT THIS TIME!
Breeding Consciousness
The empire is a given, gravity with momentum, thousands of years in the making. You cannot change it in the short term, but you can adjust it. It’s a process, not an outcome, so you can make large outcome changes in one dimension, change its dress, in fairly short order, by altering a few values, and/or you can make many adjustments in many dimensions over time to make structural changes, producing a quantum outcome, unseen until completion by those not participating, or participating unwittingly, in the value changes. The empire is a shared consciousness, a distribution moving in time perception.
Each social event horizon has assumed perception values baked into its DNA, which why most individual autonomous systems seek a like herd, resulting in a shared observers prism subject to diminishing scale returns. Their intellect is subject to determinant physical response to expected stimulus, which is re-enforced during a childhood immersed in the expected stimulus. The denial, anger, etc curve is part of the tuner.
Spiritual work is required to jump into another event horizon successfully, which creates a fuzzy logic that others may follow with somewhat less energy. Just because the herd assumes a solar system constant based upon university herd interpretation of observations made in a telescope, invented by somebody else, a long time ago, doesn’t mean that you must follow. When you hit the wall of recognition and engage the clutch, you may want to have another instrument in your bag. Don’t wait until you need the next gear to build it.
The battery problem the herd is having so much trouble with is the assumption of dc. The universe doesn’t work that way. Only gravity, the dumbest part of the universe works that way. You brain has two sides. Women are bred to favor one side as the net inductor, and men the other. The outside world is the expected resistor bank that tunes in an expected reality for most, and an unexpected reality for some. The potential difference creates a market exchange, of ideas.
So, back to that bumble bee question. Your human autonomous system is built upon a lot of other autonomous systems, which is why you can share reality, which is limited by the I/O feedback. Every software project begins by shrinking the box with deterministic false assumptions. You don’t get out of the box by mapping the inside of the box. How do you see beyond your physical limitations? What is language?
The assumption that you can rent a house out to pay the mortgage and pocket all the empire profit on resale results in what you see. Freddie and Fannie are massive RE subsidies, leveraged by derivatives, back into themselves, that have consumed the market, except the submarket swap being run by the same embezzlers, with a Nobel prize for the feedback. The Fritz healthcare scam is a similar algorithm. You don’t build a home the way you build a house, unless you want to live in a Disneyland economy, until it explodes.
Moderation: peace under pressure.
If you are receiving a low signal to noise ratio, what do you suppose that means? Which came first, the dust bowl or war? Ask Syria; an empire cannot reboot itself. You are the kernel, as much as you may want to avoid the responsibility.
An empire fears judgment, and so judges obsessively, only to act compulsively, with preemption, confirming itself. Its only possible outcome, without your interrupt, is tyranny. If you don’t like what you see don’t look in the mirror, is not a solution, as history attests, repeatedly. You didn’t create gravity, and nether did anyone else on this planet. It just is, for those who choose to dwell on it.
Fear is its own worst enemy. Just get out of its way, and do something, anything, that serves a purpose, and the rest will take care of itself. The empire isn’t going anywhere without good seed and good soil to plant it in, the destruction of which is the default option.
The Siemens circuit breaker blows up when it sees something it doesn’t expect. Until their position blows up, the cattle never see it coming. The real question is what happens before and after, on either side of the fulcrum, over time perception. How is that energy control system working out for you?
“use is flat or declining among teens,” keep-up-with-the-Jones, loss-leaders with no profit, selling soap. What’s new?
Dear Prudence
It's a Brand New Day.
I told you about Strawberry Fields,
You know the place where nothing is real.
Well here's another place you can go,
Where everything flows.
Looking through the bent backed tulips,
To see how the other half lives.
Looking through a glass onion.
Thanks, Charles,
for the cartoon above; it used to represent human behavior, but in today's world of wizards, the real cartoon are your final six words:
"Prudence alone will ignite the conflagration."
Prudence is dancing with Hope and Charity while Faith is sitting the whole thing out---it has been a long night.
Sucks when your shorts get squeezed day in and day out for years don't it?
What does he mean when he says "booking the profits?"
How are profits "booked" - just saved in the bank as FRN's? Or PMs? What?