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When? No idea. But I see signs of exce...Dear Ross,<br /><br />When? No idea. But I see signs of excess that I have not seen since 1999/2000. It's not as if professional analysts don't see them too, but their job is a thankless one: they really aren't allowed to yell "SELL", so they just go along with the crowd.<br /><br />John above makes a valid point: for almost everyone around today markets just can't fail spectacularly because...they don't. It's an article of scientific faith, almost. To them I say: remember the Titanic. It couldn't possibly sink, either.Hellasioushttps://www.blogger.com/profile/03564511281240682625noreply@blogger.comtag:blogger.com,1999:blog-4102429195693595750.post-42273279563415805182007-01-25T08:11:00.000+02:002007-01-25T08:11:00.000+02:00Dear John,
In regard to BOJ: the Japanese are not...Dear John,<br /><br />In regard to BOJ: the Japanese are nothing if not extremely deliberate and cautious. The BOJ was blamed in the past of being too fast to raise interest rates, thus killing economic recovery, so this time they are making extra sure that everyone knows exactly what they are going to do. If by now there are traders around who do not expect that yen rates will rise, too bad for them - carry trade or not.<br /><br />Generational lack of memory: I totally agree with you. Unfortunately people do not study history and cannot recognize risk when it stares them in the face.Hellasioushttps://www.blogger.com/profile/03564511281240682625noreply@blogger.comtag:blogger.com,1999:blog-4102429195693595750.post-17251718091506911502007-01-25T06:31:00.000+02:002007-01-25T06:31:00.000+02:00Muy interesante. The efforts of we humans to def...Muy interesante. The efforts of we humans to defy the laws of nature are themselves a wonder to <br />behold. So when does the whole thing give way?rosshttps://www.blogger.com/profile/14623898829606026818noreply@blogger.comtag:blogger.com,1999:blog-4102429195693595750.post-12682158757703252122007-01-25T01:35:00.000+02:002007-01-25T01:35:00.000+02:00I really enjoy the great analyses you're posting, ...I really enjoy the great analyses you're posting, and the insight into the details of the finance world.<br /><br />I have a question: Do you believe that the Bank of Japan's failure to increase interest rates on the yen last week was precisely because they did the kind of analysis you just did, and they didn't want to be blamed as the cause of a global financial crisis?<br /><br />--<br /><br />I'd like to add a couple of comments to what you've written.<br /><br />The Law of Diminishing Returns says that adding more and more of a given resource produces less return with each addition. In this case, each addition of free money to a deal yields less return.<br /><br />However, the reason that the law works doesn't depend on the price of the resource you're adding; it's because of the price of the OTHER required resources. So the marginal return is never infinity. If you add an increasing amount of one resource, then you create a demand for other needed resources, raising their prices, and producing smaller returns. You've shown this precisely in your posting by enumerating some of the other "resources" that are required -- satisfying credit qualification criteria, increasing banks' reserve requirements, additional labor and "sales" costs in beating out the competition for available money. The same kind of thing applies to free CDS money. Of all these factors, I would guess that the competition issue ends up being the biggest cost -- as in, "Who do I have to sleep with to close this deal?"<br /><br />-----<br /><br />It's worthwhile mentioning that the Panic of 1987 is one of the major CAUSES of our current problems. Reason: Recovery was fairly painless, convincing normally risk-aversive (older) investors that there was no longer anything to fear from panics and depressions.<br /><br />The reason that recovery was quick from the Panic of 1987 was that stocks were actually underpriced, having been very cheap since the early 70s. (Today, stocks are overpriced by a factor of around 2½ -- same as 1929.)<br /><br />Why did the panic occur in 1987 -- as opposed to 1980 or 1995? That appears to be because of the magic number 58. 1987 is 58 years past the crash of 1929. People retiring at age 65 were 7 years old in 1929, so they were the youngest unretired people around who still had a personal memory of it. (I've found other examples using 58. The most amusing is the ridiculous Swine Flu panic of 1976, 58 years after the Spanish Flu pandemic of 1918.)<br /><br />So in 1987, things went something like this: Just as younger people were really taking over as senior financial managers, stocks suddenly spiked a little, and the older managers panicked. When recovery turned out to be fairly painless, everyone concluded that the market had become risk-free, thus creating a generation of completely air-headed investors who created the Great Dotcom Bubble of the 1990s, and the Great Worldwide Bubble of the 2000s. The good news, if you want to call it that, is that these investors will all learn the meaning of risk very soon.<br /><br />John J. Xenakis<br />GenerationalDynamics.comAnonymousnoreply@blogger.com