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| Image borrowed from Daily Timewaster |
If you are a student of numerical methods then you learned that derivatives, that is the rate-of-change of a quantity, are inherently noisier than the average of the quantity. Making decisions based on data that are "derivatives" will generate many decisions that drive even more noise into the system. As Forrest Gump noted, "Shit happens".
Stick-slip systems
Among the noisiest of natural systems are those that exhibit stick-slip characteristics.
Imagine one string sliding over another. Further, imagine that both strings are stretched. If both strings are lubricated with oil then nothing really happens as the one string will glide over the other.
Let's change one detail in this mental picture. Let's put a tacky-but-weak coating on one of the strings. Something like rosin.
The tacky material on the one string will grab the other string and pull it out of position. When the second string is pulled far enough out of position the rosin loses its grip and the second string skids back toward it's starting posture. Dynamics might actually have the string over-shoot at which time the rosin-covered string regains traction and again bends the second string.
Those strings do not radiate much noise. The are too small to be efficient radiators. But the forces they place on the bridge and neck of the violin light up the flat panels of the front-and-back of the sound-box which are very efficient radiators.
People who invest in derivatives
People who invest in derivatives think they are wealthy. Because of the "noise" or amplifying effect of derivatives they offer outside gains on the upside. It is reasonable to speculate that they will collapse like a house-of-cards on the downside.
People are going to get testy when they realize that their pensions invested in derivatives as they sought higher returns.
Supposedly safe "bonds" might evaporate over-night.
Companies that quietly lost money for decades on "Operations" (the actual making, shipping and selling of products) have been kept afloat with the perpetual motion machine of derivatives and the selling of assets at outlandish valuations.
Normal behaviors will be abandoned as people face wealth-extinction events. This is the equivalent to stick-slip systems. They will hang on as long as they can and there will be a lot of pent-up energy when it is yanked out of their (our) grasp.
By the random spin of the roulette wheel the Democrats are in control of the US government at this time. They are faced with an extinction-level event with the coming mid-terms. I will be pleasantly surprised if they don't retain power through fraudulent means which will prove that they don't even need historically Democratic voters to stay in power.
Even if Republicans win it seems unlikely they will have the sand to pull the trigger on the short-term pain required to fix the economy.
Every sucker
Every sucker believes that they will be able to catch a ride on the last lifeboat.
Every sucker believes that digital content is eternal.
Every sucker cannot be right.
The worst carnage will be due to "damage control" on the part of people seeing their wealth slip away. Or, more likely after it is gone. Digital wealth can evaporate at the speed of light; far faster than humans can comprehend and react.
It is likely that we will prove to be our own, worst enemy.
Staying grounded
The Three Laws of Thermodynamics in plain English:
- You cannot win
- You cannot break even
- You have to play the game.
Bleak?
The upside is that most of the people in my life are positive, productive and mutually supportive.
God and I have regular conversations. Sometimes I even remember to listen.
I am blessed to have a good roof over my head, a fireplace, a well with outstanding water quality and a garden.
My needs are simple.
Our health is good.
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| For some reason our neighbors find Mrs ERJ more memorable than they find me |
Most of our neighbors recognize us by sight due to our frequent walks. Mrs ERJ distributes garden surplus to busy, young families.
Stay away from crowds. Push toxic people out of your life. Pick up good habits and lose bad ones. Given a choice, choose tools with many uses over specialty tools that can only do one thing well.
*In the interest of fairness, there are other analysts who dismiss the 10X ratio. Their logic is that the same basic bet is repackaged and resold many times and you can only count the original bet. That logic presumes that markets will remain orderly and convoluted products can be untangled and properly apportioned to contesting counter-parties.
ERJ, I have never in my life understood derivatives and so, adopting the adage of Warren Buffet to never invest in what you do not understand, I have not done so (although to your point, I am likely somehow invested). When the thing happens - and I presume at some point it will happen, one cannot fight economic gravity for ever - it will be horrible. An entire three generations or more that have come to expect that life is this way because it is ordained as such and they do not "lose" will be in for the shock of their lives (I, like you, have no faith that any government entity or party has the will to do what needs to be done).
ReplyDeleteAt best, we can hope to life simply, enjoy our lives, and as you suggest, come to understand what true wealth is.
Joe, that is a truly Brilliant post. You really nailed it. ---ken
ReplyDeleteThis is another gem in your long line of thoughtful commentary. I read a lot of bloggers to get an overall sense of the zeitgeist. In my opinion you are the rightful heir to the legacy of Ol' Remus (except I don't have to wait until Tuesday mornings to get the reports.) Thanks for all you do. I'm learning a lot.
ReplyDeleteYou are too kind with regard to comparing me to Remus. I would like to think he is out there with his lip-zipped and just watching us.
DeleteThis post was written as a pep-talk to myself. I need reminders that it isn't the fire so much as the crush at the doors out of the theater. As "Safety professionals" in industrial settings like to joke, "Few people are killed by the fall. It is the sudden stop at the end that does them in."
So...I need reminders to count my blessings and make every dime count.
I fail to understand how what is, is random.
ReplyDeleteI agree this post is spectacular.
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ReplyDeleteBarnum said it best. But if you need a refresher course I would suggest anyone born in the last 20-30 years to look up the S & L crisis in the "80s" and btw while you're at it pay special attention to what happened to "investors" that bought PM and just to feel safe left those metals in the vaults of the dealers. (cobwebs)
ReplyDeleteWe had a sweet young lady from the big city visit last spring . After she told us her and her husband had just had some asparagus at a restaurant and they discovered it was excellent Kate picked her some from our bed . She looked at us and said " you eat it right out of the dirt "? I told her jokingly to just throw it in the dishwasher . I bet she threw it away on the ride home . Sadly she was severely immune compromised and died this winter from the wuflu . Her husband also is suffering long covid and might not make it .
ReplyDeleteUniformed beat me to it. Barnum's 'sucker born every minute' holds true, especially today...
ReplyDeleteAs TB said above, when the system falls, which it has to at some point, the carnage will be much worse than 1929.
ReplyDeleteSince we don't know when that will be, it is prudent to prepare for it as insurance (among other reasons).
We're about to see the CinemaScope, Color by DeLux, widescreen version of "The Bigger They Are, The Harder They Fall". Sound by eleventy million people who refuse to believe in the law of gravity.
ReplyDeleteYup, and unfortunately they will take out some of us who do believe in it along the way...
DeleteWe have already had a derivative collapse, in 2007 when the mortgage derivative bonds collapsed. Several Wall St. firms went under and the "survivors" only did so because they cemented their vassal status with the federal government, which status has totally consumed them by now. If you haven't seen it, I recommend watching "The Big Short" as an enjoyable way to learn about derivatives. The schadenfreude is excellent.
ReplyDelete