Home > Uncategorized > 2011/08/16: Large Swings NOT the Exception…They’re the Norm

2011/08/16: Large Swings NOT the Exception…They’re the Norm

Before we even hear the much anticipated announcement of results (such as they may be) from the Chancellor Merkel-President Sarkozy Euro-zone Debt Dilemma meeting in Paris today, there is much fear and loathing over what sort of radical response the various markets might have… Especially equities. As we had a chance from afar to ponder the meaning of both the recent and recent historic significant price swings in many asset classes, we came to a conclusion:

A significant majority of (maybe even most ) casual market observers and even professional investors are poorly equipped to anticipate and manage aggressive price adjustments. Especially as it regards the professional investment class, this might seem somewhat of a surprise. However, across our long history of market involvement, we have seen many more instances of folks who rely on models that provide assumptions of incremental price movement than those who understand major adjustments are the norm and not the exception. And there was a key observation on that quite some time ago from a somewhat unexpected source (in light of his subsequent philosophy and practice.)

That is none other than professor and government official Lawrence Summers. A long time ago (in market trend terms), he had a very compelling insight why so many folks can’t seem (or more so are unwilling) to infer the necessary implications which point to occasional radical price shifts that reflect dislocations in individual markets or the overall economic structure.

To whit…

A graphic from a speech by then BoE board and MPC voting member David Blanchflower discussing the crash in late 2008 (Copyright 2008 Bank of England)

“Stochastic pseudo-world” certainly conjures up many references to both private advisory and government plans that rely on faulty assumptions. That goes back quite a long way as well; indeed to the very reason we started  Rohr International back in 1981. At that time there was very little short-intermediate term interest rate trend analysis.

Even though there had been much bond market and short-term interest-rate turmoil by that point, the classic analysis provided banks and corporate financial managers was still couched in terms of the average yield over the following six-months, one-year, etc.  Which was all fine and good when a major bond yield adjustment was roughly 30 basis points, and the very occasional 25 basis point adjustment in Federal Funds was big news.

And indeed was news, as there was not much inter-meeting communication from the Fed. Central bankers had not yet shifted from inscrutable to insufferably blabby. Back in the day “Fed watchers” were prized consultants, who could infer the subtle signs of what the next FOMC meeting was likely to bring. Interesting, isn’t it, that so much more ‘transparency’ has brought such outlandishly higher levels of instability?

So whatever the result of today’s Merkel-Sarkozy meeting, rest assured that in a major credit deleveraging cycle there are not likely any complete answers to the problems; just partial fixes that will leave us muddling along. Like the ECB 22 billion intervention that seemed to help the Italian and Spanish bond markets… or was it the short selling ban that stabilized the equities? The ECB does have limited fire power after all, and cannot continue without more major support from Germany and other successful Northern European countries.

And the proof is in the price swing. The regular $50 swings in the S&P 500 last week were moves that normally take between 2 weeks and a month. Look for more of the same from time to time, even if there are somewhat more stable periods in between.  As we noted in our 2005 1970’s Redux: Son of Stagflation, the lassitude of the political and financial class was pointing toward a return to those more unsettled conditions. Welcome back.

So go get those flared pants, and ditch the “stochastic pseudo-world” models. The days of moderate incremental price adjustments are gone, as Mr. Greenspan’s Great Moderation was the atypical phase he implied it might be. And those who can anticipate the more radical trend shift fault lines will prosper while others suffer.

Thanks for your interest.

  1. christopher maytum
    August 18, 2011 at 12:39 PM

    You weren’t wrong!!!!! Very good call or moniker, epithet, eulogy??!!

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