Drinking the red sand

(The notional amount on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument.

FT Alphaville: 'The notional value of derivatives held by US commercial banks increased $1,500bn in the first quarter, or 0.7 per cent, to $2,035bn. Net current credit exposure - the amount that would be owed to banks if all of their derivatives contracts were immediately liquidated, and the primary metric the OCC uses to measure credit risk in derivatives activities - decreased 20 per cent to $555bn. At the end of Q4 08, that metric stood at $800bn.'

The models denoting risk consider that equilibrium has been achieved therefore leashing the random walk. But if reality is the tail risk oscillations may occur.

To provide scale the CIA estimates 2008 World GDP at $61.07 trillion, with US GDP at 14.26 trillion. -AM)


October 6th, 2009
blogs.reuters.com/felix-salmon

Five large commercial banks represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure.

What are those five large banks? According to the OCC, they’re JP Morgan Chase, Goldman Sachs, Bank of America, Citibank, and Wells Fargo. Add up their “total derivatives” numbers and you get $197 trillion, which is indeed 97% of the $203 trillion in total notionals.

The report also shows the notional amounts at bank holding companies, rather than banks themselves. Suddenly, the size of Bank of America’s derivatives holdings spikes from $39 trillion to $75 trillion, while Morgan Stanley appears from nowhere to reveal itself as holding a more-than-healthy $41 trillion in derivatives. It seems that at Merrill Lynch and Morgan Stanley, the derivatives are generally held by the holdco rather than the bank, which allows the OCC to ignore them for the purposes of its headline calculations.

Add up the derivatives books at the holdcos, and the total isn’t $203 trillion any more: it’s $291 trillion — an increase of $88 trillion which is very hard to find in the OCC report unless you’re specifically looking for it. And never mind Wells Fargo, which was also something of an also-ran in the top five banks. The top five now comprise JP Morgan, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup, with derivatives holdings between them of $278 trillion. That’s 95% of the true total, or 137% of what the OCC would have you believe was the total.

All hands ... stalling speed

Analysis by Patrick Moynihan
Oct. 6, 2009
abcnews.go.com

Eighty-nine percent of Americans continue to say the economy's in rough shape, 73 percent call it a bad time to spend money and 56 percent say their own finances are hurting, all well above their long-term averages.

The ABC News Consumer Comfort Index, based on these gauges, stands at -45 on its scale of +100 to -100, vs. an average of -12 in weekly polling since late 1985.

The CCI is up 4 points in four weeks to its best since late August, and better than its lowest, -54 in January. Its best this year was -42 on May 10; its annual average, -48, is on track for its worst year to date.

When you're strange Faces come out of the rain

Anonymous Monetarist: Tonight we are pleased to have Dimitris N.Chorafas who comes to us via his book Chaos Theory in Financial Markets, published in 1994.

Dimitris: Thanks. Nice to be here.

What is Chaos Theory?

Henri Poincare realized that if a system consisted of a few parts that interacted strongly, it could exhibit unpredictable behavior. This concept is at the origin of chaos theory. The object of chaos theory is to study the irregular behavior of simple deterministic equations by providing more sophisticated tools that are closer to real life.

Change and order are essential, though they are contradictory to each other. Their incompatibility is best expressed through modes of complexity that account for phenomena that, at first sight, don't even seem to fit together.

How so?

Chaotic systems are essentially periodic. What makes them appear random is a continual transition from one periodic orbit to another.

In the past, the perceived state of randomness was thought to be due to chance. However given the strangeness of math we can show that chaos affects any system that has some sort of sensitive dependence on an initial condition. Any small change or uncertainty in conditions at a starting point will eventually make predictions about the system and its behavior extremely difficult if not impossible.

How does one adjust for this?

The point many people trained in traditional financial analysis fail to appreciate is that discontinuous changes requires a sort of discontinuous thinking. Because of its upside down characteristics, discontinuous thinking has never been popular with the upholders of continuity and the status quo- nor with mathematicians tied to classical theories.

Discontinuous thinking is an invitation to consider the unlikely, if not the absurd.

Nothing should be dismissed out of hand in a time of transition from stability to chaos - and vice versa-when discontinuities, not equilibria, are the rule.

What do you see as the principal failings of classical theories?

Classical econometric analysis assumes that if there are no outside or exogenous influences, the system is at rest. Internal or endogenous factors are thought to balance out. This rests on the hypothesis that supply equals demand and therefore an efficient market comes to play.

And this is not the case?

Nothing could be further from the truth. Both endogenous and exogneous factors can shift a financial system from equilibrium. As the market reacts, it moves from the stable conditions associated with order and tidiness. Disequilibria rather than equilibria are the characteristic properties. Living systems behave that way.

Would you consider the markets to be a living system? If so would you view government intervention as a hazard?

Yes, financial markets are dynamic, evolving structures and do not repsond kindly to attempts to control an economy and keep it at equilibrium, no matter how good the intentions may be. Even at the foundations of efficient market hypothesis, a lack of dynamic movement takes the life out of the system.

Since the characteristic of free capital markets is dynamic behavior, we need models able to represent- without undue simplification- disorderly systems that move by fits and starts. Underlying turbulence is flow, which involves shape and change as well as motion and form. Complex systems are not inherently efficient. Instead they can give rise to turbulence and coherence at the same time. Turbulence in fluids might have something to do with an infinitely tangled solution space, which David Ruelle calls strange attractor.

What is a strange attractor?

A strange attractor is a mathematical portrait of order within a chaotic environment. It is a solution space that traces the behavior of a complex system over time, revealing how it is attracted to an ideal state - essentially revolving around it.

Is there a simple analogy?

We can look at this from a flow dynamics perspective. In flow dynamics we assume that change in systems reflects some reality independent of a particular instant. It is like seeing liquid penetrating a liquid or as another example, a solid growing crystals. Both create a state of turbulence,and we are interested in the shape.

We can look at this from an information technology viewpoint.

As a system becomes chaotic , it generates a steady stream of information. Because of its unpredictability, each new observation is a new entry. The channel transmitting the information upward is a strange attractor. In the domain of strange attractors, initial small uncertainties are magnified into large patterns. Their initial condition might have been due to randomess.

Making predictions under these conditions is as if we are trying to guess the evolution of shape in space and time.

How is this of practical importance?

We can think of flows in many ways, including flows in economic and finance.

At first ,such flows may be linear. Then they can bifuractate to a complex state. Subsequently , they oscillate. Finally, they may be chaotic. Flow dynamics are characterized by a universality of shapes with similarities and dissimilarities across scales. Flows within flows are part and parcel of dynamic systems in market dynamics, among other domains.

So strange attractors represent a picture of reality's order flow?

Uh ... yes. Financial analysts who understand chaos theory look at strange attractors as engines of information. Their domain is characterized by both order and disorder. Order does in fact arise out of complex behavioral processes, through successive transitions.

A happy ending?

Chaos theory aims to represent these transitions for dynamic systems with simple attractors, the solution space may contain in its behavior sufficient information to make chaos predictable.

Thanks Dimitris.

Chaos from equilibrium gives the models a long finger

WIKI : In physics, self-organized criticality (SOC) is a property of (classes of) dynamical systems which have a critical point as an attractor. Their macroscopic behaviour thus displays the spatial and/or temporal scale-invariance characteristic of the critical point of a phase transition, but without the need to tune control parameters to precise values.

The concept was put forward by Per Bak, Chao Tang and Kurt Wiesenfeld in a paper published in 1987 in Physical Review Letters, and is considered to be one of the mechanisms by which complexity arises in nature. Its concepts have been enthusiastically applied across fields as diverse as geophysics, physical cosmology, evolutionary biology and ecology, economics, quantum gravity, sociology, solar physics, plasma physics, neurobiology and others.

(In other words accidents happen but not by accident. Chaos can spring from equilibrium for no apparent reason. And equilibrium can spring from randomness. The question plaguing the Federales' modelers is, is the equilibrium the normal state or is reality the tail risk? -AM)

WIKI : An attractor is a set to which a dynamical system evolves after a long enough time. That is, points that get close enough to the attractor remain close even if slightly disturbed. Geometrically, an attractor can be a point, a curve, a manifold, or even a complicated set with a fractal structure known as a strange attractor. Describing the attractors of chaotic dynamical systems has been one of the achievements of chaos theory.

(Equilibrium without chaos would imagine that the sandpile after enough sand has fallen will reach a steady state whereby for each new grain of sand that falls another grain is pushed off the pile. -AM)

By John Maudlin
via Minyanville

In 1987, three physicists named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there’s no typical number. “Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.”

The piles were indeed completely chaotic in their unpredictability.

(Mr. Maudlin provides a book to read,

Mark Buchanan, called Ubiquity: Why Catastrophes Happen. -AM)

Buchanan:

“To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.”

“But to physicists, [the critical state] has always been seen as a kind of theoretical freak and sideshow, a devilishly unstable and unusual condition that arises only under the most exceptional circumstances [in highly controlled experiments]… In the sandpile game, however, a critical state seemed to arise naturally through the mindless sprinkling of grains."

“There are many subtleties and twists in the story … but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world.

(Reality is the tail risk. -AM)

Researchers in the past few years have found its mathematical fingerprints in the workings of all the upheavals I’ve mentioned so far [earthquakes, eco-disasters, market crashes], as well as in the spreading of epidemics, the flaring of traffic jams, the patterns by which instructions trickle down from managers to workers in the office, and in many other things. At the heart of our story, then, lies the discovery that networks of things of all kinds -- atoms, molecules, species, people, and even ideas – have a marked tendency to organize themselves along similar lines.

(History rhymes. Vuja de non! - AM)

On the basis of this insight, scientists are finally beginning to fathom what lies behind tumultuous events of all sorts, and to see patterns at work where they have never seen them before.”

"...after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into ‘fingers of instability’ of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability.”

(Banksters that are too bankrupt to go broke most certainly raise the long finger of instability. -AM)

“In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.”

They drank it all up

(In the 1924 congressional hearings over the Teapot Dome scandal, in which Sen. Albert Fall was convicted of accepting bribes for oil-drilling rights to public lands in Wyoming and California, the senator stated... it was to say ‘Sir, if you have a milkshake and I have a milkshake and my straw reaches across the room, I’ll end up drinking your milkshake.' -AM)

Oct. 5 (Bloomberg) -- Billionaire investor George Soros said the U.S. economic recovery will be sluggish as “basically bankrupt” financial companies and indebted consumers impede it.

“The U.S. will be very slow in recovery,” Soros said in a panel discussion in Istanbul, where the annual meetings of the International Monetary Fund and World Bank begin tomorrow. “The United States has a long way to go.”

“Europe has been less damaged,” Soros said today. The European Central Bank may be faster than the Federal Reserve to start withdrawing stimulus, he said, adding that it is “too early, certainly for the United States,” for policy makers to start reversing their emergency measures.

Policy makers may struggle to revamp the regulation of the financial system now that the economy and markets are recovering, he said. “It will be very difficult to accomplish,” he said. “The crash of 2008 now seems like a bad dream and people like to treat it like a bad dream and forget about it and get back to business as usual."

('Basically bankrupt' sounds like a bland comedy on Fox.'Basically Bankrupt' in a kapitalist country. Still its' a more 'gentle' label while being consistent with his April prediction. -AM)

REPOST w/comments
MONDAY, APRIL 6, 2009

Wall Street drank our milkshake

(Failure to liquidate insolvent banksters has of course caused and will continue to cause the liquidation of the productive economy. There is no free lunch. -AM)

By: Reuters | 06 Apr 2009 | 04:49 PM ET

The U.S. economy is in for a "lasting slowdown" and could face a Japan-style period of relatively low growth coupled with high inflation, billionaire investor George Soros said on Monday.

Soros, speaking to Reuters Financial Television, also warned that rescuing U.S. banks could turn them into "zombies" that draw the lifeblood of the economy, prolonging the economic slowdown.

"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said, adding that in 2010 there might be "something" in terms of U.S. growth.

Soros' view contrasts with the majority of economists, who expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to the latest monthly poll of forecasts conducted by Reuters.

The recovery will look like "an inverted square root sign," Soros said. "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down—step down."

The healing of the banking system and housing markets is crucial to recovery. "The banking system, as a whole, is basically insolvent," Soros said.

(The only thing more stunning than the fact that he still feels the need to say this is the fact that folks still barf up the pablum narrative that this is a liquidity problem. Truly the collective consciousness have eyes but they cannot see.-AM)

Repost : the Second Great Depression

SATURDAY, NOVEMBER 29, 2008

The Second Great Depression

As stated in the introduction to this blog:

This much is clear: They will inflate until they can’t. Inflation rewards those that have their wealth first. All roads lead to deflation. The stock market will bottom when no one cares. Much like the aristocracy when the barbarians are at the gates… you save the silver (banks) first. They will destroy the village (dollar and markets) in order to save it. After the deflation is overwhelmed, the West will never be the same.

Like the authorities of the First Great Depression, the kitchen sink will be thrown until it is constrained by outside events.

As Citizen Jesse points out today in his commentary on a recent Krugman blog:

'And this is where we do part company with Mr. Friedman and Ms. Schwarz and join Lord Keynes in his observation that it requires fiscal and legislative actions to repair an economic shock such as the country was experiencing in the early 1930's....
Keynes would have likely observed that money supply was not enough, but was only a first step in stabilizing the system. The 'real cure' was to get people working again, to provide wages and gainful employment, to encourage consumption and economic activity.'

Am in complete agreement with Jesse and here are some concrete steps we can take to achieve that:

1) Accelerate construction of housing projects for
low-income urban residents.

(2) Accelerate infrastructure construction in rural
areas.

(3) Accelerate construction of railways, highways,
airports and other major infrastructure.

(4) Accelerate health, culture and education
development.

(5) Enhance environment.

(6) Speed up innovation and structural adjustment.

(7) Speed up the reconstruction of the hurricane stricken
areas.

(8) Improve the income of urban and rural residents.

(9) Implement tax reform,encourage technological reform, and reduce the
burden on companies.

(10) Increase financial support for economic growth.


The blueprint is provided courtesy of The Peoples's Republic of China's '10 Measures for Increasing Domestic Demand and Increasing Economic Growth.' put out on Novemebver 5th, 2008.

History shows that the countries that spent more money on social development came out of the First Great Depression faster.

(Add-on: I did change earthquake to hurricane in #7 of Big Red's Action Plan.-AM)

Those that fail to stand for something will fall for anything ... don't tread on me.

When I was very young I had a recurring dream.

My bedroom was always pitch dark and I slept by the window. In my dream I would be awakened by a sliver of bright light that made the bottom of my window shade glow.

Pulling up the shade I would see children playing in a blazing dazzle of white, I wanted to join them but couldn't leave my bed ... my last thought before waking up with a smile and feeling great, this must be heaven.

Would be nice if heaven were a place where 'nothing ever happens' or you could get yourself ' a little piece of heaven, waiting for the time when Earth shall be as one' as some of our modern bards have opined- where you could play a slow game with your friends as careless as a child.

Trouble with today is there may be too many folks rushing to get to heaven.

Watched some previews of movies in theaters last night, with the baby asleep, on my Comcast on demand, ADD's best friend, and just have to say even as someone who still has all his comic books and is a big scifi geek ... enough with the apocalypse already okay?

Today's zeitgeist is that the revolution will be vaporized.

Socioeconomically, depressed folks are what cause a depression, expanding to a bigger picture here's hoping that the optimistic social prognostications enjoy a second derivative change sometime soon so we can win this game of Chicken with ourselves.

But first something to creep you out.

Methinks there are creepier days out there than October 13.

For example, given that I live just a few miles from the Sears excuse me harumphhh ... Willis Tower ... I must say that I most especially do not like the dates of 11/01/09 and 09/01/11.

Don't much worry about 01/09/11.

Why? Well, Chicago weathers are nasty and these wily coyotes like to hunker down for the winter. The first two dates referenced irk me because...

http://www.wor710.com/pages/5275288

Please google or youtube, if link above does not work, 'Daniel J. Hill'.

On a personal note, my Irish Catholic father was a demolition guy in the U.S. Army after Korea. Hill when describing how he would take us out sounded to me a lot like my father ... entirely plausible.

Will leave it to you to research the role that symbolism plays in the machinations of our adversaries.

However, I leave you with Okum's razor : 11/01/09 and 09/01/11 are the two most symbolic and therefore most likely dates.

Summation:

It was Hill who converted to Islam as a young U.S. Army paratrooper stationed in Beirut in 1958. It was Hill who learned fluent Arabic. It was Hill who joined the Mujahedeen Freedom Fighters in Afghanistan and fought the Soviet invasion there in the 1980s. It was Hill who personally met Osama bin Laden. It was Hill who used information from Islamic extremists to warn Rescorla that terrorists would use the underground parking garage for a car bomb attack on the World Trade Center. It was Hill who asked the U.S. government to assist him in an assassination attempt on bin Laden in 1998 (the request was rejected). And it was Hill who warned the FBI just weeks before Sept. 11, 2001, that his Mideast contacts told him "something big" was about to happen in the United States, in New York, Washington, D.C., or Philadelphia — maybe all three...Hill said the next terrorist attack will involve suitcase nuclear bombs that will be detonated in small, low-flying two-seater private airplanes manned by men hanging onto the belief that, like the 9/11 hijackers, they are about to die as martyrs and enter paradise.

And now for something cautiously optimistic from the Ancient Roubini , Nosterdamus:

forgottenagesresearch.com
comments by Joseph Robert Jochmans


Before long all things will be set into a different order,
The new century and millennium (dawning of the twenty-first century) could see a window (a new dimension of opportunity) opening,
Those who hold to the old ways and hide behind masks of lofty power will be utterly changed,
Few will be found who shall remain in leadership. Century II, Quatrain 10

Many of the common people will want to come to terms in agreement,
With their great lords (world leaders) who wish to bring the threat of war upon them,
The people, finally tired of their words, will no longer want to hear anything more they have to say,
Alas, only in this way - when humanity begins to lead for themselves instead of following others—will God send peace to the Earth. Century VIII, Quatrain 4, Duplicate

That which destruction and weapons of war could not accomplish,
Nor the diplomatic tongue in endless meetings could ever achieve—the advent of true world peace, Instead in sleep, in a dream, the Leader will be reached by those who meditate,
He will come to realize that the true enemy of humanity is destructive war itself and the spilling of blood. Century I, Quatrain 97

A New Peace is possible, places built without defense of war,
Uninhabitable regions settled and developed again,
Abandoned acreage, houses, fields, towns occupied at will,
After a long age of famine, disease and war (our world today), the land shall be returned to cultivation. Century II, Quatrain 19

There can be Peace, a Union, and changes,
Estates, offices of power done away with, the old world upside down,
For the first generation, painful readjustments to the new ways of doing things,
Wars will cease, conflicts settled by civil processes and debates. Century IX, Quatrain 66

Many countries, towns, cities, realms and provinces which will have abandoned their old customs to gain freedom without responsibility, will discover themselves enslaved even worse, and will secretly tire of their delusion of freedom. Looking here and there, they shall search for faith lost and return to a more perfect religion (re-ligio, inter-connectedness). They will wish to restore the concepts of the holiness of all things, for a long time forgotten, and be in harmony only with the original sacred writings. Epistle to Henri II

For some the transformations toward peace will be very difficult,
The common people of cities and provinces will gain by the changes, Their hearts held high to heaven, prudent leaders established, the old cunning politicians out of power,
The relationship between humanity and land and sea will enter into a new harmonious state. Century IV, Quatrain 21

Armies and their generals will be driven away, never to fight again,
The idle soldiers will be put to hard work planting fields in the countryside,
Towns and cities will settle differences through debate instead,
Hearts will be heavy because of so many blackened carcasses (those who died because of past wars). Century I, Quatrain 5

That which has always been deeply desired will finally be made manifest,
There shall be reconnection, peace, love and concord everywhere,
The wedding song of harmony will not be sung by everyone,
High officials brought low, some high ones put to death because of their crime.Presage 67

(Patriot. Optimist. Outraged. May God bless and keep safe the United States of America. -AM)