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Guest Post: Feedback, Unintended Consequences And Global Markets

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Feedback, Unintended Consequences and Global Markets

We cannot know that unintended consequences will always be destructive. Neither models nor projections have accurate track records in predicting the future.

It seems an appropriate time to re-examine why our ability to predict the future of complex systems is so poor. A significant number of well-informed, smart people believe the Euro Experiment is unraveling in a positive feedback (i.e. self-reinforcing) death spiral.

Another significant number of people believe the market meltdown is overdone/oversold and global markets are set to rally despite the bad news. Their view is founded on negative feedback, i.e. forces that resist or counter the prevailing trend.

In the case of global markets, these forces include technical support/resistance, market intervention by The Powers That Be (TPTB) and the large number of people and instituions with stakes in the survival of the Status Quo: politicos, pension funds, wealthy Elites, government employees, and so on. These people stand to lose sufficient wealth and financial security to motivate them to "fight to the death," so to speak, to support the Status Quo.

All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks.

Projecting current trends is also an erratic and inaccurate method of prediction. The current trend may continue or it may weaken or reverse. "The Way of the Tao is reversal," but gaming life's propensity for reversal with contrarian thinking is not sure-fire, either.

If it was that easy to predict the future of markets, we'd all be millionaires.

Part of the intrinsic uncertainty of the future is visible in unintended consequences. The Federal Reserve, for example, predicted that lowering interest rates to zero and paying banks interest on their deposits at the Federal Reserve would rebuild bank reserves by slight-of-hand. Banks would then start lending to qualified borrowers, and the economy would recover strongly as a result.

They were wrong on every count. Zero interest rates (ZIRP) destroyed the returns of pension funds and savers, and drove investors into intrinsically risky "risk-on" trades such as stocks, long-term bonds (care to bet on what the interest rate will be in 5 years, 10 years or 20 years? Based on what crystal ball?) and various carry-trades. Paying interest to banks destroyed the incentive to lend and increased the incentives to speculate, knowing that "too big to fail"--the acme of moral hazard--meant the Treasury or Fed would bail out any bets that soured.

With margins so low and collateral so impaired, banks have had weak incentives to risk making loans and strong incentives to deposit money in the Fed to safely earn interest at zero risk.

With money supposedly "cheap" but scarce and dear in real life (other than mortgages backed by the Federal Government, another extension of moral hazard), then the reflation of assets the Fed predicted has failed to materialize except in the stock market, which has doubled under the fire-hose of liquidity provided by QE1, QE2, Operation Twist and various other monetary-inflation gambits.

Rather than organically boost risk assets via stronger demand in the real world, all these measures accomplished was to addict the markets to Central Bank injections of "free money."

Not only have all these consequences been unintended, they have also been perversely and highly destructive to the real economy, systemic stability and trust in the institutions of central states and banks. If you had set out to bleed the real economy, stability and trust in institutions, you could not have designed a more effective policy than that of the Fed and the European Central Bank (ECB).

There are no easy or painless ways to undo the unintended consequences, just as there are no easy or painless ways to "fix" what is unfixable, i.e. the euro, the U.S. financial system, the Chinese real estate bubble, etc.

All these forces are positive feedback, as each reinforces the others. Given this data, it seems obvious the global market systems will destabilize and disintegrate, and probably sooner than later.

But this overlooks the difficult-to-quantify forces of negative feedback, mostly based on the great number of people who have much more to lose if the Status Quo crumbles than they stand to gain. Thus artifice, slight-of-hand accounting, empty promises, money-printing and all sorts of other attempts to stabilize what is clearly destabilizing will be applied in full measure.

Just as we cannot predict the future, we cannot predict unintended consequences. We cannot assume they will all be destructive or negative; on occasion, policies "get lucky" and the unintended pathway has unexpectedly positive results.

Given what we know about failed fixes, it seems clear the global financial Status Quo will continue to destabilize if current policies continue. What we don't know is the precise pathway of that destabilization. We could summarize this uncertainty by saying that various feedbacks, positive and negative, will counter each other and feed back (self-reinforce) similar feedback loops, and which one has the upper hand at any one moment sets a trend that lasts until the other gains the upper hand or the two reach some sort of equilibrium that may or may not last for a time.

It's easy to model systems with a few variables, but the predictive track record of models is poor. It's also easy to project current trends, but the predictive track record of projecting current trends is also poor.

The best we can do, it seems, is to be alert to both existing positive and negative feedbacks, and be alert to new feedbacks which could fundamentally alter the system.

 

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Mon, 05/21/2012 - 12:42 | 2447984 AlaricBalth
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Love those Fat Tails

Mon, 05/21/2012 - 12:46 | 2447992 THX 1178
THX 1178's picture

I like fat tails and I cannot lie.

Mon, 05/21/2012 - 12:51 | 2448002 augustusgloop
augustusgloop's picture

fat bottom tails you make my rockin' world go 'round

Mon, 05/21/2012 - 12:57 | 2448022 Xkwisetly Paneful
Xkwisetly Paneful's picture

It is soooooooooo difficult.

So pay me an obsene amount of money and when it blows up well it was sooooooooo difficult to begin with.

These people are rivaling some of the all timers when it comes to ludicrous self promotion.

Mon, 05/21/2012 - 13:02 | 2448037 iDealMeat
iDealMeat's picture

OT:  Criminal Banksters..

 

Rajat Gupta joined Goldman's board in 2006 and left in May 2010, seven months after Rajaratnam's arrest. Gupta, who was arrested last October, was also formerly a director at P&G and American Airlines.

 

Jon Stevens Corzine (born January 1, 1947) is the former CEO of Goldman Sachs[2] and of MF Global, and a former American politician, who served as the 54th Governor of New Jersey from 2006 to 2010. A Democrat, Corzine served five years of a six-year U.S. Senate term representing New Jersey before being elected Governor in 2005. He was defeated for re-election in 2009 by Republican Chris Christie.[3] In March 2010, Corzine was named chairman and CEO of MF Global Inc., a financial services firm specializing in futures brokerage. The company filed for bankruptcy protection in October 2011, and Corzine resigned on November 4, 2011.[4][5]

Corzine began his career in banking and finance. In the early and mid 1970s, he worked for Midwestern banks (Continental-Illinois National Bank in Chicago, Illinois and BancOhio National Bank in Columbus, Ohio) during and after his master of business administration (MBA) studies at the University of Chicago Booth School of Business. In 1975 he moved to New Jersey to work for Goldman Sachs. He became Chairman and CEO of Goldman Sachs and the leading advocate in the firm's decision to go public. In 1999, having lost a power struggle with Henry M. Paulson, Corzine left the firm. After his departure from Goldman Sachs, he earned what has been estimated to be $400 million during the 1999 initial public offering of the company

 

Mon, 05/21/2012 - 14:02 | 2448232 Aziz
Aziz's picture

Hopefully the next office he will be running for is prison janitor.

Mon, 05/21/2012 - 14:35 | 2448344 greyghost
greyghost's picture

ass hat alert from charles hugh smith!!!!!! quote: "all models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables". DOES THIS APPLY TO YOU SHIT WORK LAST WEEK ABOUT "PENSIONS"??? I CALLED YOU OUT THEN ABOUT NOT KNOWING WHAT YOU WERE TALKING ABOUT!!!! LUMPING THOUSANDS OF DIFFERENT PENSION PLANS, DEALING WITH MILLIONS OF PEOPLE!!!!

quote: "projecting current trends is also an erractic and INACURATE method of PREDITION" unquote. DOES THIS OR DOES THIS NOT APPLY TO YOUR CRAP ONE OR TWO DAYS LATTER ABOUT MEDICARE??????

YOU HAVE ANSWERED MY QUESTION FROM LAST WEEK! I NOW KNOW YOU ARE PAID BY THE WORD AND NOT WHAT YOU KNOW!!!!!!!! UNBELIEVABLE

Mon, 05/21/2012 - 12:45 | 2447991 RunningMan
RunningMan's picture

Blah blah blah... collapse.

Mon, 05/21/2012 - 12:50 | 2448000 Cultural Capital
Cultural Capital's picture

The greatest threat today is a poverty of imagination. 

Mon, 05/21/2012 - 13:26 | 2448108 Gazooks
Gazooks's picture

put some imagination to work on this: an current example of 'unintended consequences'

 

 

So, this may be a bit off-topic, but speaking of trust in the fuck-suits there's some very strange shit happening in LA with the hallmarks of media censorship typical to managed 'national security' issues. Especially when black-op or possible false-flag events surface unpredictably and very inconveniently.

 

The media lid is on since its initial reporting a week ago, but it's very curious given the glaring back-story omissions of the MSM reports in links below of other underlying elements as reported from official Russian sources.

 

Something may desperately be trying to get out of the bag that the FBI is as desperate to keep quiet. First read the Russian account copied below, then the very sketchy and controlled MSM versions. Somethings' up and it needs an attentive, skeptical audience with persistent and independent investigative resources.  Maybe it's nothing more than 'an incident', but it has the feel and smell of deep shit.

 

http://www.huffingtonpost.com/2012/05/13/stephen-ivens-missing-fbi-agent...

 

http://abcnews.go.com/US/video/fbi-agent-missing-in-california-16341946

 

http://articles.cnn.com/2012-05-15/us/us_california-missing-fbi_1_fbi-ag...

 

http://latimesblogs.latimes.com/lanow/2012/05/fbi-agent-remains-missing-...

 

May 16, 2012

 

FBI Agent Fleeing Massive Manhunt Warns “They’re All Insane”

 

By: Sorcha Faal, and as reported to her Western Subscribers

 

 

A bizarre Foreign Ministry report circulating in the Kremlin today states that this Friday past (11 May) Russian Envoy Vladimir Vinokurov, the Consulate General of San Francisco, was approached near his hotel room during a visit to Los Angles by an agent of the United States Federal Bureau of Investigation (FBI) identifying himself as Stephen Ivens [photo top left] who warned that he and a former FBI agent named Donald Sachtleben had uncovered evidence of an impending terror attack on US soil stating that those behind the attack were “all insane.”

 

Before Ivens was able to finish his “message,” this report says, the three American Diplomatic Security (DS) agents, who trail all Russian diplomats in the US, began to “surge” towards Ivens causing him to flee.

 

According to US news sources, Special Agent Ivens, after leaving downtown Los Angeles, returned to his home in Burbank whereupon he then fled into the rugged Verdugo Mountains after which a massive manhunt for him ensued involving 100 FBI agents, 40 sheriff's department rescuers and a dozen local police officers.

 

FBI officials stated to the local media that Ivens was “distraught” and “might be suicidal” adding that they believed he had in his possession his service weapon.  At no time, however, did anyone ever state as to why Ivens would be in such a state.

 

According to other US news sources, Special Agent Ivens graduated from Braintree High School in Massachusetts 18 years ago and was selected by his fellow students as “shyest” in his class. He was further described by FBI colleagues as well liked, a devoted agent with no history of disciplinary action on the job, and according to FBI spokeswoman Laura Eimiller “Married with a one-year-old child, he has been working for the FBI for the past three years in the national security area. Prior to that, he worked as a Los Angeles police officer for eight years.”

 

Late yesterday, after the massive manhunt failed to find any trace of Ivens, his wife Thea Ivens issued an urgent public appeal stating: “Steve, if you are out there listening right now, your wife wants to let you know, 'Babe, we are in this together for better or for worse. I love you, no matter what happens.' Your child wants you to know, 'Daddy’s work? Daddy home?’”

 

Even more bizarre about this case, this report continues, is that the retired FBI agent named Donald Sachtleben mentioned by Ivens, who also knew about this impending “plot,” was arrested within hours of Ivens disappearing and charged with trading child pornography.

 

Most important to note about Sachtleben was, aside from his being an over 25-year veteran of the FBI, he was a special agent bomb technician before retiring in 2008 who specialized in counter-terrorism and bombing investigations and whose most important case was the 11 September 2001 attacks on New York City.

 

According to US news reports about Sachtleben’s arrest, this most knowledgeable of FBI agents openly traded child porn using the e-mail address ‘pedodave69@yahoo.com’ in an act so stupid for one of the United States most highly trained intelligence agents it defies belief.

 

The practice of US intelligence services charging their most feared dissidents with child pornography and/or sex charges is well known, with the most celebrated case being against the former UN weapons inspector William Scott Ritter, Jr. who warned about the lies being told to the American people in the run-up to the Iraq War only to find himself sent to prison on trumped up charges involving a minor girl.

 

 

To exactly what kind of false flag plot Agents Ivens and Sachtleben had uncovered this report doesn’t say, other than to note that the credibility of this information should not be dismissed due to how fast and hard US intelligence agencies are acting to cover their tracks should any additional information come forth.

 

Grimly to be noted is the use of false flag operations by the United States and their political elite classes are well known and well documented, the most famous of them being Operation Northwoods.

 

Operation Northwoods was a series of false-flag proposals that originated in 1962 within the United States government, and which the Kennedy administration rejected. The proposals called for the Central Intelligence Agency (CIA), or other operatives, to commit acts of terrorism in U.S. cities and elsewhere. These acts of terrorism were to be blamed on Cuba in order to create public support for a war against that nation, which had recently become communist under Fidel Castro. One part of Operation Northwoods was to “develop a Communist Cuban terror campaign in the Miami area, in other Florida cities and even in Washington.”

 

Operation Northwoods proposals included hijackings and bombings followed by the introduction of phony evidence that would implicate the Cuban government. It stated: “The desired resultant from the execution of this plan would be to place the United States in the apparent position of suffering defensible grievances from a rash and irresponsible government of Cuba and to develop an international image of a Cuban threat to peace in the Western Hemisphere.”

 

 Several other proposals were included within Operation Northwoods, including real or simulated actions against various U.S. military and civilian targets. The plan was drafted by the Joint Chiefs of Staff, signed by Chairman Lyman Lemnitzer and sent to the Secretary of Defense. Although part of the U.S. government's Cuban Project anti-communist initiative, Operation Northwoods was never officially accepted; it was authored by the Joint Chiefs of Staff, but then rejected by President John F. Kennedy.

 

As the events of Oklahoma City and 9/11 prove, however, the appetite for false flag operations against the American people by their own government is far from sated, with the next one, undoubtedly, being the worst of them all.

 

May 16, 2012 © EU and US all rights reserved. 

 

Mon, 05/21/2012 - 15:33 | 2448557 mvsjcl
mvsjcl's picture

Strange. You'd of thought that 911blogger would have picked-up on this.

Mon, 05/21/2012 - 17:11 | 2448858 Iwanttoknow
Iwanttoknow's picture

Gazooks,

Sorcha fal is a well known disinfo unit of naval intelligence.

Mon, 05/21/2012 - 20:36 | 2449312 Gazooks
Gazooks's picture

 + tribute Iwanttoknow, ...I've been Sorchaed but will not Faal again.

whereas I could find no link to NI, had I checked sources carefully it would have been disinfo clear.

my thanks, weallwanttoknow thetruthofitall

Mon, 05/21/2012 - 13:58 | 2448221 Xkwisetly Paneful
Xkwisetly Paneful's picture

+1,762,363

Not everywhere though:

Can read above or just consider that the banks think they can treat the markets like agricultural crops and hire physicists to predict the future.

Mon, 05/21/2012 - 12:51 | 2448003 MsCreant
MsCreant's picture

This article did not say anything most of us here do not already know.

Chaos theory talks about "strange attractors." You cannot predict perfectly because you cannot know all the variables, nor indeed, measure them reliably if you did. But the data points (see a 3 D or N D model in your mind) will flow around a chaotic shape that still has constraints on it...until it doesn't (butterfly wings across the ocean and all). It can flip in an instant. But inside that period of time, you can know roughly where a data point will land. The variance, however, may be unacceptable in terms of trying to chart a course of action. 

The economy is in a strange attractor would be another way of saying all the above, maybe better.

No, I'm not an expert, just an observation.

Mon, 05/21/2012 - 13:09 | 2448052 kridkrid
kridkrid's picture

It's interesting to me how often CHS posts get labled this way, "something that most of us already know"... but he mostly talks about things that very few outside of the community talk or write much about.  I shared this article: http://seekingalpha.com/instablog/399928-the-gold-report/598001-the-empe...  with a friend of mine today.  Literally a few hours ago.  His response: People making these sorts of predictions need to start giving rough predictions of when. Otherwise they are no different than the folks predicting religious Armageddon and just predicting it again when it doesn't happen. If someone making this sort of prediction gives a timeline (rough and can be something like within the next couple years), that's one thing. But "soon" becomes "well government action delayed it, but will only make it worse" and pretty soon ten years have gone by. 

My response was basically a couple of lines saying what CHS just posted (I guess that's a more valid complaint about CHS... he does use a lot of words to get to some fundamental ideas).  The post above... Blah, blah, blah.... collapse is a nice summary.

Anyway, I for one like most of his posts and am glad he does post frequently.  One other observation... I bat about .900 in predicting that he wrote the guest post based on the "headline".

Mon, 05/21/2012 - 13:23 | 2448074 pkea
pkea's picture

well, some are paid good money to answer WHEN question:)

 if you are good at something as joker said never do it for free...ha

Mon, 05/21/2012 - 13:28 | 2448115 kridkrid
kridkrid's picture

My favorite Joker line: "See, their morals, their code: it’s a bad joke. They’re dropped at the first sign of trouble. They’re only as good as the world allows them to be. You’ll see, when the chips are down these civilized people will eat each other.”

 

Not knowing the timing doesn't impact the end result.

Mon, 05/21/2012 - 13:25 | 2448106 Winston Smith 2009
Winston Smith 2009's picture

"People making these sorts of predictions need to start giving rough predictions of when. Otherwise they are no different than the folks predicting religious Armageddon and just predicting it again when it doesn't happen."

Wow, his argument is seriously flawed for that comment alone.  General economic and market predictions which indicate that we are headed for big trouble can be done using grade school math and observable facts and figures while religious anything is based upon superstitions that I rate as being equal to all other superstitions that have come and gone over time (i.e., garbage).

Mon, 05/21/2012 - 13:30 | 2448125 kridkrid
kridkrid's picture

well, in his defense, I've been talking about the pending economic collapse for a long time.  He's coming around.

Mon, 05/21/2012 - 12:57 | 2448012 Winston Smith 2009
Winston Smith 2009's picture

Would you trust Bernanke to predict let alone control the weather?  So why is he trusted by some to manipulate, in effect, the equally complex to predict accurately world economy using CRUDE economic models?  That's what this short video asks:

http://www.youtube.com/watch?v=jIP7ES1lCGk

 

Mon, 05/21/2012 - 13:02 | 2448033 Xkwisetly Paneful
Xkwisetly Paneful's picture

Why not?

Unaccountable science runs the world.

Why should the fed be any different than any other obviously polluted with academic fukktards government entity?

This is evolution right?   To go from man on the ground to man in the ivory tower rule.

No doubt this is extremely difficult afterall the theoretical academic fukktards tell me that every opportunity. There is nothing easy about bought and paid for science.  

Mon, 05/21/2012 - 13:14 | 2448070 Winston Smith 2009
Winston Smith 2009's picture

Via political and academic inertia, an obviously flawed economic model is being used.  That's the problem.  You need to know what the problem is to try to fix it IF and WHEN the opportunity presents itself (after the next huge crash).  The Fed and banks do not want to kill the goose that lays the golden eggs.  A truly long-term healthy economy is in their best interests, too.  They are driving us down this fatal path because the current economic models are useless at this point.  This debt-based problem is unlike all others they've tried to deal with in the past and it is one for which their models are totally wrong.  Take three minutes to watch the video I've linked to.

Mon, 05/21/2012 - 13:24 | 2448096 Xkwisetly Paneful
Xkwisetly Paneful's picture

Close, via influence and corruption unaccountable social scientists are largely dictating the plight of the human condition.

They are driving us down this path because their gameplan is to inflate away and marginalize future obligations. Just as they have solved same unbelievably difficult to solve problem in the past.

 The comical thing is the solution to prevent same from occuring again is simple.

Instead of depending on academic fukktards who are always late, most of whom should be acting while they are gathering data and generally do nothing but exacerbate both sides by being late up and down,

very simple, when the ecnonomy is booming is when it is time to raise taxes and grow government,

when the economy is contracting is the time to cut taxes and shrink government.

actually govern for a change instead of being an accelerator.

 

 

 

Mon, 05/21/2012 - 12:57 | 2448020 MunX
MunX's picture

All I need to know is all exponential functions have limits. Knowing where or when is not as important.

Mon, 05/21/2012 - 13:01 | 2448036 Winston Smith 2009
Winston Smith 2009's picture

What you need to know is that the economic models currently in vogue don't even use in their calculations the exponential functions now reaching their limits, as described in the video I linked to above.  That is a primary problem that must be fixed.  Of course, it won't be fixed in time to avoid the catastrophic economic effects we are headed towards.

Mon, 05/21/2012 - 13:38 | 2448146 mikesswimn
mikesswimn's picture

Yes, exponential functions do have limits, but that limit, oftentimes, is "infinity".  I suggest you start looking into that whole "where" and "when" thing.

Mon, 05/21/2012 - 13:01 | 2448030 michael_engineer
michael_engineer's picture

"Not only have all these consequences been unintended, they have also been perversely and highly destructive to the real economy, systemic stability and trust in the institutions of central states and banks. If you had set out to bleed the real economy, stability and trust in institutions, you could not have designed a more effective policy than that of the Fed and the European Central Bank"

 

I suspect that the real driving force behind the motivations and mechanizations being played into the market and the economy are simply adjustments that are being made to counter the effects of resource availability/depletions issues in a world that is now as full as it is going to get.

Mon, 05/21/2012 - 13:04 | 2448044 Winston Smith 2009
Winston Smith 2009's picture

The developed world is trying to sustain via credit and debt, as it has done for the past three decades, levels of pre-globaliztion prosperity that are no longer justified.  We have been living off of our personal and governmental credit cards.  That is now becoming unsustainable.

Mon, 05/21/2012 - 13:20 | 2448093 michael_engineer
michael_engineer's picture

There is some truth to what you say, because you limit yourself to the developed world.  But as a whole, the world never ever really runs on credit.  It always runs on the physical resources and stockpiles that are in hand.  This borrowing from the future and from our grandchildren is really an "urban legend" and is pure bunk.  Although it is a fact that if we deplete a resource, there will be less of it for future generations to use, in no way should this be considered borrowing from those generations.

Mon, 05/21/2012 - 13:27 | 2448114 Winston Smith 2009
Winston Smith 2009's picture

"There is some truth to what you say, because you limit yourself to the developed world."

And I did so because that is where "our" problem lies.  The less developed world has nowhere to go but up, eventually.

Mon, 05/21/2012 - 13:34 | 2448129 michael_engineer
michael_engineer's picture

Unless they also rely on resources production rates that may eventually decline in some way too.  Even though they are not part of the developed world, if they rely on food from nations that can't maintain an energy intense farming economy having a surplus to ship to them, then 

"Up is Down"  -- Captain Jack Sparrow

Mon, 05/21/2012 - 14:09 | 2448249 Winston Smith 2009
Winston Smith 2009's picture

"The less developed world has nowhere to go but up, eventually."

You'll note that I didn't exclude "and then, eventually down, just like us" in that.  And their reliance on external food sources is world market-based.  When that changes, so will they, either through starvation, increased production and production efficiency, or a mix of the two.  It may very well be a bumpy road.

The world is heading toward an equilibrium.  With multinational corporations, sources of labor are as mobile as capital.  Over time, we are headed down, they up.  Fluctuations in that are to be expected.

Mon, 05/21/2012 - 13:01 | 2448035 dbTX
dbTX's picture

One thing that can be predicited with absolute certainty is that the FED will do what benefits its owners, take that to the bank.

Mon, 05/21/2012 - 13:03 | 2448040 midgetrannyporn
midgetrannyporn's picture

I don't think it is unintended consequences, they just don't care. Sure, they would rather everyone was hoodwinked but they will keep stealing no matter what.

Mon, 05/21/2012 - 13:11 | 2448058 ArrestBobRubin
ArrestBobRubin's picture

Failbook provides a wonderful example of Unintended Consequences.  The proles Ain't Buyin' it anymore. Failbook, or any of the rest of the bankster's Bullshit.

In a case of marvelous irony, banksters like Jivin'-Jamie Dimon and God's (piece of) Work Blankfein are the very ones who schooled us not to believe even a single word they say anymore

Nice work schmucks. Well done!

Mon, 05/21/2012 - 13:18 | 2448082 Winston Smith 2009
Winston Smith 2009's picture

Yep, I've got to say that the failure of FB has given me just a tad, but only a tad, more respect for individual investors.  I think it has shown that it is HFT and banks alone that are holding up the market and that individual investors just ain't playing the suckers' game any more.

Mon, 05/21/2012 - 13:23 | 2448099 michael_engineer
michael_engineer's picture

Look at the Hubbert curve (http://www.theoildrum.com/node/7062) to see where Microsoft, Intel, Cisco, etc went public. There was still growth left in economies and reasonable debt burdens and forward looking investments were stronger as a result. Now we stand close to the downslope of that curve with huge debt loads for sovereigns at every level, and for the people too. Does forward looking investment look anywhere near as promising?

Mon, 05/21/2012 - 13:44 | 2448164 Winston Smith 2009
Winston Smith 2009's picture

Not to mention that the FB valuation of 110B (initially) was absolutely INSANE.  That's why I said I have only a tad more respect for investors.  It was just so damned obvious, so obvious that even the formerly FB IPO pumping Blodget at BI is now using the same sort of back-of-the-envelope, grade school math that I've used to prove how insane that valuation was and is.  He's still way off, though.  He throws in Apple along with Google for some reason instead of just using Google in the calculations (exactly the same business model - ad clicks).  Perhaps he doesn't want to make it too obvious that he's using something similar to the method that I posted all over his site which uses Google only, a common sense valuation estimate that any pundit could have very easily done prior to the IPO (but didn't to my knowledge).  Using just Google and a simple calculation, FB stock at the numbers being offered for sale should be selling for less than $2/share.

Mon, 05/21/2012 - 13:11 | 2448060 Piranhanoia
Piranhanoia's picture

Paging Dr. Asimov.  

Mon, 05/21/2012 - 13:15 | 2448073 Kreditanstalt
Kreditanstalt's picture

...SLEIGHT of hand...!

Mon, 05/21/2012 - 13:16 | 2448079 AldoHux_IV
AldoHux_IV's picture

There is much more to lose should the status quo be defended and perpetuated for everyone involved because the system doesn't work to provide opportunity for those seeking it. Imbalances will correct and the longer we postpone it the worse it will be as those who have been benefitting will become greedier and those who have been not will become more desperate and violent. The system doesn't have to be zero sum nor so diastorous-- that only comes from those who will vehemently fight change, but change is a part of life and in the end we can choose to gain from change or just repeat the same mistakes of history and devolve or at best limit ourselves.

Mon, 05/21/2012 - 13:29 | 2448122 TJ00
TJ00's picture

Blowback may be more important than feedback here, as in the blowback from-

 

Giving money to support banks, but leaving the people to rot.

Alllowing criminality like the MF Global heist to go punished.

Politicians, bankers and governments pronouncing statements that are not only false or misleading, like price inflation, but are the opposite of what the populations expereince every day, there is a limit to how long cognitive dissonance can be maintained in the face of reality.

 

Mon, 05/21/2012 - 13:32 | 2448128 mikesswimn
mikesswimn's picture

Why does this guy keep getting a regular "Guest Post"?

"All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks."

No, not all models of "non-linear complex systems" are crude.  We can model the distribution of heat as it transfers and diffuses over a material in three dimensions using parabolic partial differential equations.  Similar tools in mathematics can model the propogation of sound through the oceans.  These are no small achievements.  Coincidentally, these same general tools are used to solve the Black-Scholes equation used to price European options under a specified set of assumptions.  These are not "tricks" and they are absolutely not "algorithms" (although numeric methods do exist), these are partial differential equations and they are powerful tools.  That being said, they are difficult to work with, and for those of you involved in options trading, the underlying assumptions leave something to be desired.  But the fact is, the "tricks" themselves do not have proscribed limits, the assumptions do.

No professional modeller actually believes his/her model accurately explains markets, nor do they think that their model can predict the future.  These are fool's errands and if you find a modeller who actually thinks they can accurately explain the market or predict the future, fire them immediately.  The last thing my profession needs is a bunch of goal-seek geniuses, and assholes like the author railing against their own misguided ideas about how models work.

"All models are wrong, but some are useful" - George Box

Mon, 05/21/2012 - 17:01 | 2448793 Variance Doc
Variance Doc's picture

Exactly.  Mr. Smith doesn't have a clue what his is talking about when it comes to modeling.

Most of the mathematical models used in finance are based on results from mathematical physics (e.g. diffusions) and as you correctly point out, only as good as the assumptions used to construct them.  Violations of assumptions are not a flaw in the model, but are a result of the *user* misapplying the model.

A lot of big losses we have seen over the years are not the result of the misapplication of models, but due to greed, pure and simple.  I know one of the head quants at Countrywide (before BAC), and the models were forecasting high probabilities of defaults, but they were ignored by the higher management due the amount of money flowing into Countrywide.  Pure greed.  We all know how that ended up.

Never-the-less, models (even non-linear ones) have been highly successful.  Just remember that Mr. Smith when you travel in the big silver bird across the sky - it was built on a non-linear mathematical model.

 

 

Mon, 05/21/2012 - 17:59 | 2448990 koperniuk666
koperniuk666's picture

well you write the post then smart ass

Mon, 05/21/2012 - 13:43 | 2448167 neagea
neagea's picture

quote:

Not only have all these consequences been unintended, they have also been perversely and highly destructive to the real economy, systemic stability and trust in the institutions of central states and banks

:unquote

 

What if these consequences were absolutely indented? People all too easily believe that they are governed by idiots with all the best intentions. If leaders were chosen randomly you would at least expect someone getting things right every now and then.

 

I think, assuming that our leaders are all morons, means giving them more credit than they deserve. By today's standards for example even Nixon would have to be considered an exceptionally law-abiding and respectable president.

I am afraid we cling to the illusion that the people destroying our economic and political foundations are idiots because we are too afraid to realize that we are ruled by people who do not have (and never had) our best interests in mind.

We can either assume that they are the idiots or alternativly realize that we are the idiots.

And I am no idiot for sure!

Right?

 

C

Mon, 05/21/2012 - 13:54 | 2448209 Winston Smith 2009
Winston Smith 2009's picture

Most politicians are effectively idiots when it comes to economics.  The special interests they allow to write their legislation for them aren't.  In the end, the voters are the primary idiots for continuing to elect the same politicians regardless of results.  However, how can one expect the voters to be any less clueless on the same complex topics where "their" politicians are also effectively idiots?  So, the whole thing is fundamentally doomed to failure over time unless one has a majority of politicians willing to commit political suicide by doing the correct, but short-term painful things that are actually in the public interest?  But what are the odds of than happening?

Mon, 05/21/2012 - 13:49 | 2448190 WallowaMountainMan
WallowaMountainMan's picture

"We cannot know that unintended consequences will always be destructive"

one maxim that i hold is there are no unintended consequences. there are only consequences. to the extent that there are any consequences that do harm, that is an indication that there is a flaw in the fundamental assumption(s) behind the action that caused the consequence.

using the occurrence of 'unintended consequence' as a tool to trigger an examination of the underlying assumption can prevent a continuation of, and an increase in, the frequency of the occurrence of the 'unintended' consequences of implementing that assumption.

 

Mon, 05/21/2012 - 13:52 | 2448196 YesWeKahn
YesWeKahn's picture

Conclusion: Bernanke is an idiot.

Mon, 05/21/2012 - 13:57 | 2448220 Winston Smith 2009
Winston Smith 2009's picture

No, he's an ivory tower delusional who religiously believes in an obviously and seriously flawed economic model that when compared to the models used for predicting something as complex as the world economy, the weather, is shown to be laughably simplistic.

Mon, 05/21/2012 - 16:50 | 2448800 EclecticParrot
EclecticParrot's picture

The problem of non-linear systems only serves to increase the importance of the common butterfly (e.g., Chaos Theory's Butterfly Effect), happily entering their adult stage in many parts of the country.  Some of the world's greatest minds were fascinated with the common Lepidoptera, most notably Nabokov.

As most of you know, these fine insects, when first emerging from the pupa stage, must allow a bit of time for inflation, that is, engorging their wings with blood and allowing them to dry.  Contrary to popular belief, certain species of adult butterflies, or imago, may live up to a year.

I suspect Mr. Bernanke, despite his resplendant beard, is unaware of the potential Butterfly Effect of toying with inflation, analogous to turning these beautiful creatures into economic killers.  Perhaps he views the overall system as linear.  Perhaps the polymorphism of these insects, as well as their ability to mimic other species, has fooled him.  Here's hoping a Painted Lady lands on his balding dome soon, and wakes him from his dogmatic slumber ...

Mon, 05/21/2012 - 17:58 | 2448983 koperniuk666
koperniuk666's picture

We cannot know the exact path of failure but we can make one solid prediction. The system will fail.

- An Engineer

 The complexity of modern life

The Engineer puts it exactly right - we live in a complex inter-related world which NO ONE understands; not even those geniuses from Oxbridge with brains so large that their personality fails. This system - world finance and everything else - WILL FAIL. I have no idea when but right now we are like a teacup set upon a mattress with only 2 or 3 bedsprings.  Every impact on any spring has a major impact on our spring. The teacup will fall over. In the old days there were 60+ low tech, vaguely connected springs in the mattress and it was more resilient then..........SO.......In the beginning, it was all so simple. Rub two sticks together, get a fire. Stick a pipe in the ground, get some oil. Trade a cow, get a llama. Simple systems require only straightforward applications (of engineering, inter alia), with little need to examine precisely how individual components might interact. But as our global production system has evolved, so too has the level of complexity amongst the various components. Our society, based on ever-advancing technology of all kinds, has become a seething morass of indecipherable, arcane interactions between mind, body, finance, and resources and the internet exacerbates this. What was once a world of isolated simple systems is now what we (so creatively) call a complex system. Complex systems don't have straightforward relations between cause and effect (input and output) because there are such high numbers of interactions within the system. As such, complex systems fail in complex ways.

  

To clarify; every complex system -- whether a drilling system, climate system, financial system or bureaucracy

-- is destined to fail or shift states dramatically. This is particularly true when inputs are rapidly increased or decreased,

such as with the after-effects of Peak Oil or ...


 

QE. TARP, TWIST, Deficit spending???

But I could be wrong

 

 

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