In The USA: the Next Revolution

[Bill Moore]

Posted by Cannady,

What's the difference? The value of a service or good is determined by the demand for it and its available supply. Mating demand with supply is precisely a market does by definition. Folks tend to forget that supply and demand are functions that evolve over time plus some other parameters. So markets need not only deal with a snapshot of some God's eye view of the condition of buyer and seller, but also with risk each takes in agreeing on a price now for fulfillment later.

What are the other parameters? Are you making an argument that markets are rational and predictable? Your use of value is technically correct, but I was referring to value as value to society (goods and/or services), and a lot of the market action today has nothing to do with that type of value. Got it, that is just the way it is, that is how the system evolved so those in the know can make a lot of money that is often disassociated with the true value of a company's goods and services. The system still works if you look at from the optic of the stock's value, and not the underlying value of the company. I guess at heart I'm more of a value investor. One would think with the major market correct there are a lot of value buys out there now, but like the masses I remain suspect that something else is going on and it may be impossible for the common investor to find true value now.

You needn't introduce such an awkward, loaded notion as "artificially determined value" to understand "to big to fail." You just need to get rid of the assumption that either value or losses are conserved.

Artifically determined value is a loaded phrase, agreed, but there have been instances when stock prices have been "artifically" manipulated (in clear violation of the law). This has always happened, but it seems logical that the risks are greater now due to globalism and the coorisponding ability to move money rapidly around the globe. It may be impossible for governments to effectively regulate this behavior.

Yes, there are. One is scale. The other is empiricism. Another may be that you're overestimating the performance of your portfolio, or your contribution to its success.

Are you the author of a "Random Walk on Wall Street"? Agreed again, but at least it seemed that market conditions were somewhat more predictable then, and if the old rules no longer apply, what has changed? Why has it changed? And is that change good?

[Surferbeetle]

Bill, Fuchs, et. al,

Happy Thanksgiving to all.

You might find these links to be of interest when thinking about risk, debt (return rates, quality, ability to recover principle, gross vs net, etc), volatility, and transparency with respect to the topology and networks of the sausage making process that is finance.

Heed the ‘transparent’ lessons from MF Global, By Dr. Gillian Tett, November 24, 2011 5:39 pm, Financial Times, www.ft.com

Investors have also made the painful discovery that credit risk and asset price swings are not the only thing which can damage portfolios; counterparty and liquidity risks matter too. And they have realised that published, audited accounts do not reveal those subtle, secondary counterparty and liquidity risks; nor do the reports that hedge funds have traditionally given their clients.

These lessons are having tangible consequences. One is that the audit profession is now, belatedly, engaging in new soul searching. In the coming months, for example, American auditors will hold a series of round-tables to discuss whether their time-honoured system for auditing banks, say, needs to be updated for the new internet, Twitter age.

Zero Hedge blog background from wikipedia, http://en.wikipedia.org/wiki/Zero_Hedge

Zero Hedge is an American financial blog. It reports on Wall Street and the financial sector and is credited with bringing the controversial practice of flash trading to public attention in 2009 via a series of posts alleging that Goldman Sachs' access to flash order information allowed the firm to gain unfair profits. The blog is written by a group of people who write under the pseudonym "Tyler Durden". Though derided by the mainstream press as being fraught with conspiracy theories, the blog grew quickly and has been called a "blog sensation".

URL for the Zero Hedge Blog www.zerohedge.com

[Surferbeetle]

Shamelessly lifted from Zero Hedge although I have seen this chestnut elsewhere...

It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted.

It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.

He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

And that, ladies and gentlemen, is how the governments of the world are doing business today.

[Presley Cannady]

What are the other parameters?

Any number of covariant indicators depending on the model and what the modeler believes to improve the predictive power. Space, liquidity of the instrument, temperature, rainfall, salinity, underlying instruments, etc.

Are you making an argument that markets are rational and predictable?

"Rational" is a teleological concern; I don't really care if markets are rational or not. They are conditionally predictable.

Your use of value is technically correct, but I was referring to value as value to society (goods and/or services), and a lot of the market action today has nothing to do with that type of value.

That definition of value, if I'm reading you correctly, is subjective and useless.

Got it, that is just the way it is, that is how the system evolved so those in the know can make a lot of money that is often disassociated with the true value of a company's goods and services.

In other words, "true value" is some subjective measure taken that permits you to sustain the argument that the take extracted in its trade is unjustified.

The system still works if you look at from the optic of the stock's value, and not the underlying value of the company.

Objectively, there's no difference between the two. A stock price measures an aggregate demand, just as the price of an exchange traded derivative measures aggregate expectation of performance.

Artifically determined value is a loaded phrase, agreed...

Specifically since it relies solely on your subjective estimation of value.

...but there have been instances when stock prices have been "artifically" manipulated (in clear violation of the law).

I mug you and take $50 dollars from you. Cops never find me. Have I artificially manipulated my cash pile by $50, or is that $50 real enough to buy a surf and turf dinner?

This has always happened, but it seems logical that the risks are greater now due to globalism and the coorisponding ability to move money rapidly around the globe. It may be impossible for governments to effectively regulate this behavior.

Governments have been losing to commerce since the ratio of subject to flatfoot went above 10 to 1. Which is why the most heavily regulated economies--totalitarian ones--rely on collective and arbitrary depredation to keep black markets from thoroughly overwhelming their veneer of control.

Are you the author of a "Random Walk on Wall Street"?

Nada; and I try as often as possible to steer people away from pop finance and economics books.

Agreed again, but at least it seemed that market conditions were somewhat more predictable then, and if the old rules no longer apply, what has changed? Why has it changed? And is that change good?

There's no evidence that the market is more volatile today than it was in previous years. Our understanding of volatility has improved, which may contribute to the spectrum running from mere insecurity to outright panic over more visible fluctuation.