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Meredith Whitney made a famously bearish call on the municipal bond market. Now our Congresscritters really really want her to testify before them.
Apparently the controversial analyst has so far "rebuffed the committee's attempts" to have her testify on February 9 at a hearing, and they might resort to subpoenaing her and her controversial report if she continues to refuse.
When Whitney said on national television that between 50 and 100 major muni bond defaults will probably happen over the next year, investors panicked and withdrew billions of dollars from muni bond funds.
As usual, short sellers and "speculators" get blamed for providing information to the market. This doesn't, of course, change the fact that most major cities are bankrupt.
Just heard about this via AntiWar Radio:
(I'll link to the radio show archive as soon as it's up).
Fragility: easily damaged by insults
Robustness: able to withstand insults
Evolution has designed the human body with robustness. The liver and spleen, both somewhat delicate organs, are protected behind the bottom of our ribcage. Peripheral nerves can regenerate. The most vital organ in the body--the brain--is encased in hard bone. The organs that probably suffer the greatest violent insults--bones--can heal to near baseline strength after breaking. The peripheral arteries are located very deep within the tissue of our limbs.
Another way the human body achieves robustness is via redundancy. We have two kidneys. Should you receive a spear to one kidney (and somehow manage to survive the insult), your other kidney will take up the slack. In modern times, this is how people can donate a kidney and do just fine. There's redundancy.
We also have two lungs, two eyes, two ears, two testicles/ovaries, etc. One of the most redundant systems in the body is the superficial venous system. You can knock off lots and lots of superficial veins and other veins will take over the return of blood flow to the heart, which is the basis of the treatment of varicose veins.
Consider a person who has donated a kidney. Now that system no longer has redundancy. If that one kidney fails, he's in deep trouble. So he has to really watch his health--monitor his blood pressure, avoid getting Type II diabetes, and avoid major trauma. His body is now more fragile.
Consider a person whose kidneys no longer work. Now he's on dialysis. His body is extremely fragile. He's dependent on an artificial kidney (dialysis machine) which only approximates the real thing to an imperfect degree. Patients can sometimes live a long time on dialysis, but in general, their life expectancy is limited compared to someone with one or two kidneys.
Let's consider that you have $100,000 saved up. Divide that into ten portions, or "aliquots", of $10,000. Let's say you invest one of those $10,000 portions. If that investment fails, you still have nine more portions--$90,000--left. This strategy of only investing one out of ten portions is not that risky. Why? Because it's redundant. Just like you have two kidneys, you have ten portions.
Let's say you invest five of those portions, i.e., $50,000. If that investment fails, you still have $50,000 left. Still pretty good, but potentially half of your savings could be wiped out. That would be analogous to losing one kidney. The system, initially redundant and hence robust, is now fragile.
Perhaps we can assign a "redundancy factor" of 9 to the first scenario (nine portions saved to one portion invested). That would mean a redundancy factor of 1 to the second scenario (five portions saved to five portions invested).
Let's say you invest nine of those portions, i.e., $90,000. If that investment fails, you only have $10,000 left. Our redundancy factor would be 0.11 (one portion saved to nine portions invested). You're getting more and more risky with your money. If your investment fails, you only have a little bit of savings left. Your net worth is fragile.
Now let's consider that you don't have any savings. Instead you borrow some "portions" from other people. Let's say you borrow $10,000 from someone else. If your investment goes bad, that borrowed portion goes bad, and you owe another $10,000 to the person you borrowed from. You'd probably have to sell your other possessions in order to pay it back.
This is a very precarious situation. The redundancy factor is now negative. I'm not sure the proper way to calculate it-- perhaps -1 (one portion borrowed against one portion needed to be liquidated in case of investment failure). Regardless, I don't want to get into any argument about this redundancy factor that I made up. It's simply a conceptual exercise.
As we move along the various scenarios, one thing becomes clear: the less redundancy you have, and the more debt you take on, the more it becomes paramount that your investment is a success. You have to get it right. You have to make a sound judgment about the economy, your competition, people's preferences, your enterprise, etc. You have to get it right. The more you borrow, the more vital it is that you perform. This is fragility. Any small mistake can ruin the whole thing.
In an economy in which people, corporations, and the govt are taking on massive amounts of debt, you have fragility. Everyone taking on debt has to be extremely accurate about the future or else they're in deep, deep trouble.
The amount of debt has increased since 2008. We now have greater fragility in the system than 2008. Going into more debt is no solution--it's throwing gasoline on the fire.
This post was inspired by the writings and interviews of Nassim Nicholas Taleb, though I'm not sure he'd agree with all of it.
The previous post was inspired the writings and public statements of Nassim Nicholas Taleb. I've read his books and watched pretty much every interview he's given that's available on the internet. I like to try to express other's ideas in my own way, so that's what I'm trying to do here.
In many interviews he gives, especially on CNBC, the questioner inevitably asks him, "So what's the next Black Swan?" I'm not sure how he holds back his rage every single time, but Taleb politely responds that by definition, a Black Swan is something that is not predictable by most people, and if a lot of people predict it before it comes true, it's not a Black Swan. He usually adds something along the lines of, "I can't predict when and in what form the next Black Swan event will take place. What I can tell you is that financial system is extremely fragile right now."
Tying this into the prior post, the interviewer is asking a question about kinetics--when, and how? Taleb, though, responds with an answer about thermodynamics. The current state of the economy is fragile-- that's probably a better word than "unstable", but means something very similar. The system is extremely susceptible to insults, and by extension, a Black Swan event. If such an event were to occur, the economy would suffer tremendously. Taleb doesn't know when such an event might occur; it could be tomorrow, a year from now, or ten years from now.
He mentions in this interview that he wrote a new section in the 2nd edition of The Black Swan just to explain this point--the relevant part is about four minutes in.
"Fragility" and "robustness"--the latter being the ability to withstand Black Swans--are thermodynamic concepts.
I hate suburbia and the bour-geoi-sie...
I have to say... this commercial is downright genius in so many ways:
- the eyeliner
- the producer mouthing along to the lyrics
- "it's not really raging"
- hating suburbia but loving your bank
- intense drummer
- random guy in the back wearing funny hat saying, "It sucks!" (not in the TV version)
Ally Bank is slowly entering the pantheon of great ad wizards.
Suppose there was a treehouse that was shoddily built. There weren't enough wooden planks, and the ones that were there were held in place by rusty nails. Further, the tree on which it was built was old and rotting, and located in an area prone to wind gusts.
You could justifiably make a statement as to the current state of the treehouse relative to a possible future state. Namely, its current state is up in a tree, but some time in the future, the pieces of wood would be lying on the ground, along with any unlucky children that might be atop it at the wrong moment.
You might say that the current state of the treehouse is unstable. In the future, it will be in a more stable, though also more disordered, state. You might even say that there's a force pulling the treehouse from its current unstable state to its future more stable state.
Remembering back to my chemical engineering days, one of the concepts that seemed to transcend the field is difference between thermodynamics and kinetics. What I've described above is a statement of thermodynamics: how stable the current state of affairs is relative to some other state, which way the arrow of causality wants to move between the states, how strongly the pull is between one state and another.
Kinetics, on the other hand, would describe how fast the treehouse would move from its current state to the future state, what path it would take, what factors would speed up or slow down that change, etc. A kinetic analysis might involve the equation d=1/2gt^2.
Thermodynamics speaks simply to the stability of a system. It doesn't say how quickly or in what exact manner any change might happen; that's what kinetics is for.
Right now, the worldwide monetary system is in an extremely unstable state of affairs. The instability is caused by debt, fiat currency, and monetary inflation. We have ample thermodynamic knowledge of that fact. A more stable state of affairs lies at some point in the future: a world with much less debt, an end to fiat currencies, and lack of central monetary policy. What we don't have is kinetic knowledge: when that future world will come about, how quickly, and in what manner.
All we can do is try our best to protect ourselves from the current instability, and even those means are not obvious.
To be continued...
h/t George Donnelly
In a provocative Foreign Policy article, economist Charles Kenny cuts through the gloom:
...[I]n 1990, roughly half the global population lived on less than $1 a day; by 2007, the proportion had shrunk to 28 percent -- and it will be lower still by the close of 2010.
Global capitalism is awesome.
Arnold Kling recommends putting together credential free zones within existing cities where governments could experiment with relaxing credential laws that currently exist in professions like education, medicine, hair dressing, teaching, interior design, taxi services, and etc.
This reminds me of China's special economic zones or Paul Romer's Charter Cities.