N=1

once you've seen a black swan, it's no longer a "black swan"

Oct 02, 2022

Markets have been bad this year. The S&P 500 has had one of the worst years in a decade and the NIFTY is barely getting by thanks to the BAAP & HODL crowd.

US bonds have had one of the worst drawdowns in history.

The TLT (iShares 20+ Year Treasury Bond ETF), is now down more than 40% from its peak in August-2020.

The US 60/40 investor is down more than 20% while meme-investors have felt a special kind of loss.

So, yes - a lot of pain in both retirement and speculative portfolios. And when there is pain, investors seek out “reasons.” And only the most controversial/scary headlines scale the social-media leaderboard.

THIS IS A LEHMAN MOMENT
- every nutjob since 2010.

Only this time, it is some shitty European bank.

Credit Suisse and Deutsche Bank have been in the dumps for longer that I care to remember. They are both the chronically sick children of the European “extend and pretend” head-in-the-sand approach to cleaning up bank balance-sheets after 2008. And in a weird “If you're not first, you're last” vibe, Credit Suisse has been willing to blow itself up in the pursuit of fees. Archegos, Greensill, and the Citrix LBO, to name a few recent ones.

So, it’s no surprise that CS is down 80% from its Jan-2018 peak.

The Lehman bankruptcy was a “black swan” - the stuff that made Taleb intolerable for the next decade. Thankfully, we don’t live in 2008 anymore. The rules of the game have changed. The system is inoculated - what didn’t kill it has made it stronger. Also, the post-2020 pump was not because of a credit-binge. It was largely a fiscal over-stimulation.

The markets are experiencing a hangover, not an implosion.

Remember, at one time Nike was supposed to be software-platform/social-networking company. And NFTs!!!

Now down more than 50% from its late 2021 peak.

It’s not like they suddenly stopped making shoes or people stopped running. The market just got a bit ahead of itself.

So, relax. This too shall pass.

Markets this Week

Links

Black-Scholes (and related) models, for which Nobel prizes were won: we do NOT use them as models, we use them as normalizations only, as a convenient change of variables. (thread)

Joe Weisenthal @TheStalwart

Goldman's measure of financial conditions is at its tightest level since spring 2020. In this environment, it doesn't take much of a nudge (like a change in fiscal policy) to start breaking things

There are three distinct policies that go under the name of QE. (thread)

The shortest economic suicide note in history? (lse)

Jeanna Smialek @jeannasmialek

The idea that New Zealanders randomly invented the 2% inflation target is ~true, but not the full story. The full story is even more fun. A thread.

Kyla Scanlon @kylascan

it's great that the 2% targeting is because a guy on New Zealand TV was like "hm yeah that sounds about right" https://t.co/BqjfbAEH0E https://t.co/Ud8XJDWWip

John Allen Paulos @JohnAllenPaulos

The Efficient Market Hypothesis subtly sidesteps the Liar Paradox: The stock market IS efficient if and only if most (or at least a sufficient number of) investors believe it IS NOT efficient. --><-- More at math.temple.edu/~paulos/whos_c…

Something to keep in mind while back testing - most of the “inefficiencies” would not have been accessible during that time. Regulations, technology, liquidity and cost of capital play a large but ambient role.