Clive Corcoran

Krugman as Architect, Bezemer as Mechanic

"If one can see all the states of motion from one position to the next, the true function of the subject can be understood. The quality of motion is fundamentally related to effectiveness of function."

Alas I think that this is where the problem lies in the mathematical approach that most macro-economists have taken. In my estimation there is no underlying logic to the motion or trajectory of asset prices and that is why we get bubbles and recessions. There are no continuous functions for mathematicians or accountants to understand and/or track. Price gaps on charts and liquidity meltdowns and crashes only highlight and underline the fundamental "discontinuities" in the way that investors perceive the financial world especially during critical episodes.

I would suggest that there are essentially non-linear dynamics at work where tipping points and critical contagion episodes are inherently part of the fabric of the fabric of economic life and this is what constitutes the "irrationality" of markets. More precisely it constitutes the non-quantifiabilty of some of the key assumptions of macro-economists such as market liquidity and the "animal spirits".

For me Krugman's observation about the lack of liquidity in the baby sitting coop was quite illuminating and, to take as benign a view as one can about current shenanigans with HFT etc., this may well be the real requirement for financial policy-makers i.e. how to promote liquidity in a market place where collective trust and unfettered collateral have been exhausted.

In a mammoth piece for NY Times Magazine, Paul Krugman wonders how economists got it so wrong.

The part I enjoyed the most was his quote from H.L, Mencken
"There is always an easy solution to every human problem — neat, plausible and wrong"

Six Ambiguities Facing Asset Allocators

Larry
Thanks for all of the tips - to where should I send the cheque?

Chinese Tiger Raises Default Concerns

Thanks for this Interesting piece.
Presumably these must be otc derivative contracts or swaps?

What the Aussie Dollar Might Tell Us About Stocks

There's no doubt that several neo-Armageddon forex traders got seriously caught out by yesterday's early drop in the S&P.

One is still left wondering who is ruling the roost - did the Aussie dollar show the way or were the equity trading desks planning to squeeze the overly anxious short traders in S&P futures and that message got through to the forex traders seated nearby?

One thing is for sure trading across asset classes is highly entangled and too closely correlated in my opinion.

Four Reasons We're Headed Even Higher

While I might agree with you that there will be a lot of clairvoyant pundits that are likely to be premature in calling the top I think you should not be quite so cavalier in the claim that "Financial armageddon is in the rear-view mirror"

With a debt/GDP ratio approaching 100% (and that's on a benign view of the size of the debt) and with a lackluster recovery at best, imho, there are still a lot more twists and turns to the rolling financial crisis ahead.

A Global Tax on Financial Transactions?

Adair Turner's comments are quite radical and he is not getting much support from his fellow establishment figures in the City friendly Labour government. Gordon Brown and Peter Mandelson have never met a banker who they didn't immediately want to honor with a knighthood at least!

The Mayor Of London has called Turner's proposals "crackers" and is clearly doing all he can to discredit the Tobin Tax and protect the banking/financial services community who are his most vocal and well-heeled constituents.

The main thrust of Turner's comments goes to the question of just how "socially useful" much of investment banking really is. His view, which is similar to that expressed by Simon Johnson in these columns, is that financial services are disproportionately large, engage the talents of many who could make more socially useful contributions elsewhere in the economy, and that the UK (and by implication the US) economy would be smart to be less reliant on their risk prone ingenuity.

Bernanke Being Rewarded for Failure

"What this country needs is a Fed Chairman that is immensely unpopular"

For those who care about their savings and would like to be rewarded adequately with proper interest rates for postponing immediate consumption the current chairman is immensely unpopular.

It is the financial elite who love zero interest rates, and shout the loudest, that Obama was "listening" to when he re-appointed Chairman Ben. To incur their wrath would really mean that his administration would be going against the grain

Wednesday FX View: Sterling Slides, While Euro Plays Second Fiddle to the Dollar

One of the more interesting pairs is USD/CHF which shows the dollar on the verge of a breakaway from a wedge pattern on the daily charts that goes back to early March

Predicting Financial Crises: Are Macroeconomic Models Useful?

"On prediction in economics, perhaps someday improved models will allow us to do better than we have so far at predicting the exact timing of crises."

There is something inherently counter-intuitive about predicting economic crises. If we "know" when one is coming it will come sooner rather than later as nobody will wait for the actual predicted date to arrive. They will either become self-fulfilling and happen sooner or avoidance tactics will prevent them happening on the specified dates.

While it certainly would be good to be able to predict earthquakes and other natural disasters there would seem to be a fundamental disconnect between the geo-sciences and those that deal with human behavior

Struggling with Divergences

Some with a touch for melodrama could even describe the candlestick on he S&P 500 after Monday's session as a "gravestone doji".
It certainly isn't the most bullish stick in the repertoire

The Anticipated Prime Mortgage Problem Has Arrived

Reading this article reminds me of just how nonchalant most commentators and policy makers - including Bernanke and Greenspan - were when the sub-prime problems surfaced more than two years ago.
Their inability to extrapolate from sub-prime to massive problems across the whole mortgage market is surely a further indictment of the "Who could have seen this coming" mythology which has been perpetrated by those who were receiving compensation which suggested that they were able to think outside of the box but clearly couldn't.

More Asset Bubbles and a Dollar Primed for Collapse

You ask the perfectly legitimate question "Who will loan us the money?"
The answer is -- "The future"

The Federal Reserve Is Immoral

Zero interest rates tell us pretty much all we need to know about how our financial system works in the 21st century. The western economic system is totally addicted to debt but cannot face a cold turkey program.

As long as our policy makers can present forecasts and hopeful scenarios with even a glimmer of hope for a better future, as a society we will continue to use an inflated discount rate for future cash flows. With this in place we will continue to rationalize the fact that we can borrow more money from the future to feed our bad habits today.

Economy Might Suffer, But That Won't Prevent a Stock Rally

Maybe the reason why so many stocks are paying huge dividends is that investors are less sure that the dividend stream is going to continue in more austere times.
Also don't forget that HFT algorithms don't stick around long enough to capture dividends
If the rallies continue on the back of a typical holding period of a few seconds rather than a few years the normal discounted cash flow models seem like quaint curiosities from another era.