Thursday, May 1, 2014

The Markets are Fixed

Gasp!  "Gracie, tell me it is not so!"

The story within the numbers.

About 35 years ago an eager, young engineer named "Lee" set out to make a mark in the world.  He was given the task of performing a numerical simulation on a very complex system.

Lee presented his findings in a slick in a room full of very senior (and smart) people.

One of those people called him out: "Son, don't waste our time by trying to blow smoke up our butt.  You 'cooked' those numbers.  Don't do that again."  It was a bit of a scandal.

Lee's chart matched the benchmark too well.  Simulation typically matched "reality" in an approximate kind of hand drawn by two different second graders.  The simulation protocol allowed two "fudge factors", a scaling coefficient at low frequency and a scaling frequency at high frequency with interpolation between those two frequencies. Lee's chart matched the benchmark like a snug, latex glove.

The smart people in the room knew that "pretty" curves are always artifacts of human intervention.

The regular oscillations of the right side of this curve remind me of a basketball being dribbled down the court.

This chart shows the heavy hand of human intervention.  The intervention starts in January-February of this year.  It is as if a hand came out of the sky and smacked it down to 2.6%.  It then allowed the curve to rise until it hit 2.8% before it smacked it down again. And again. And again.  And again.

Back to Lee

Had Lee not been called out for his misfeasance by the titans of industry, the simulation would have been as useful as a pet rock.  Simulations are supposed to be predictive tool.  There is much learning that happens as one reconciles simulations and "reality".  Sometimes one finds wild excursions in the model that exist in "reality" but nobody anticipated that anti-node and had the foresight to monitor it.  In other cases the execution of reality deviates from the don't fit, adhesive paths wander, welds are not between the indicated panels, components with identical specifications do not have identical dynamic responses. 

Heavy intervention in the interest rate markets perverts the economy's primary feedback loop.  Economic enterprises are winding up like a steam turbine without load and without a governor.  Tsunamis of capital are flooding every enterprise regardless of merit or possibility of repayment.

One of the primary strengths of Capitalism is the efficient allocation of resources.  Misallocation of resources guarantees increased misery.  Sadly, the Elite who are in power value appearances and cleverness over an efficient, smoothly running economy.  They place more importance on their image than on the very real misery that "the little people" are doomed to endure.

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