|
PureBytes Links
Trading Reference Links
|
Thank you, doctor, for the excellent Japan perspective, it brings out the
core systemic differences between 1989 there and 1999 here.
>From the institutional standpoint, one thought keeps striking me, courtesy
the exisitence of the relatively smooth big-picture risk transfer mechanism
here in the US...
How much sudden damage (as in 1987, 1929) can be done in the US market
anyway?
Even in 1987, the market fell 15% from its peak over a 2 week period before
Black Monday... that, for a market used to growing 15% per year must have
set off alarms somewhere before the Monday happened.
Since then, everybody macro level is presumably hedged, or can get hedged
with lightning speed.
Everybody that is not hedged, loses money and has their investment assets
taken away.
If everyone flows from protection to protection - the way the risk transfer
mechanism works between the mechanism's intermediaries, seems to me it
creates its own natural checks and balances re velocity of one way moves and
the extent that they can impact the market adversely at a macro level.
If anything changes the fundamental premise of a long term directional move,
the whole institutional investing world recognizes it, and adapts.
Like you say, money has to find a home somewhere.
Conceptually, this tendency ot checks and balances would seem to explain the
stairstep market we've been seeing for the past 4-5 years - where economics
and demographics set aside, the risk transfer mechanism played a major role
in containment.
The fat tails of recent years came from individual trades gone wrong and
herd mentality riding that entity's misfortune, not systemic problems as
evidenced in Japan.
1994 was a mass exodus due to fixed income - but the party was over in a
brief couple of months.
1996 was a mass exodus due to tech rotation - but that party was over in a
month.
1997 was a piggy back on Mr Neiderhoffer, and that was over in 2 months.
1998 - ditto LTCM, again over in 3 months.
1999 - whatever the reason (I honestly forget) but it was a smooth down
move, some cages rattled, and game over.
The point of the above data - is that the velocity was contained, and the
extent of damage was contained.
Big-picture trends (eg investor preferences into Europe-Asia over USA, into
tech out of fixed income, of demographic investment trends etc)
notwithstanding - can 1987 happen??
Sure, chinks develop in the system every now and then - where volatility
goes north of 100% and the Specialist Function ceases to exist as a stopper
in the velocity of one way moves or the occasional rogue trade gets done
that has market-wide impact.
Seems to me these sharp narrow "small time" 10%-20% "corrections" would get
more prevalent, as opposed to any sustained bear market - since the system
gets too expensive for anything more to happen, and the world leans on the
wrong side too much, and we over-correct in the opposite direction, swiftly.
Opinions, Doctor?
Gitanshu
|