{"id":31884,"date":"2018-03-04T10:34:53","date_gmt":"2018-03-04T15:34:53","guid":{"rendered":"http:\/\/olduvai.ca\/?p=31884"},"modified":"2018-03-04T10:34:53","modified_gmt":"2018-03-04T15:34:53","slug":"sucker-traps-and-the-arithmetic-of-risk","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=31884","title":{"rendered":"Sucker Traps and the Arithmetic of Risk"},"content":{"rendered":"
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Sucker Traps and the Arithmetic of Risk<\/a><\/h3>\n<\/div>\n
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John Hussman has another excellent article out this week but it will be ignored. Mathematically, it must be ignored.<\/p>\n<\/section>\n<\/div>\n<\/header>\n
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In the Arithmetic of Risk<\/a>, Hussman posted the above chart. I added the anecdotes regarding where we are. Here are some pertinent snips.\u200b<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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At present, I view the market as a \u201cbroken parabola\u201d \u2013 much the same as we observed for the Nikkei in 1990, the Nasdaq in 2000, or for those wishing a more recent example, Bitcoin since January.<\/p>\n

Two features of the initial break from speculative bubbles are worth noting. First, the collapse of major bubbles is often preceded by the collapse of smaller bubbles representing \u201cfringe\u201d speculations. Those early wipeouts are canaries in the coalmine.<\/p>\n

In July 2007, two Bear Stearns hedge funds heavily invested in sub-prime loans suddenly became nearly worthless. Yet that was nearly three months before the S&P 500 peaked in October, followed by a collapse that would take it down by more than 55%.<\/p>\n

Observing the sudden collapses of fringe bubbles today, including inverse volatility funds and Bitcoin, my impression is that we\u2019re actually seeing the early signs of risk-aversion and selectivity among investors. The speculation in Bitcoin, despite issues of scalability and breathtaking inefficiency, was striking enough. But the willingness of investors to short market volatility even at 9% was mathematically disturbing.<\/p>\n

See, volatility is measured by the \u201cstandard deviation\u201d of returns, which describes the spread of a bell curve, and can never become negative. Moreover, standard deviation is annualized by multiplying by the square root of time. An annual volatility of 9% implies a daily volatilty of about 0.6%, which is like saying that a 2% market decline should occur in fewer than 1 in 2000 trading sessions, when in fact they\u2019ve historically occurred about 1 in 50.<\/p><\/blockquote>\n

…click on the above link to read the rest of the article…<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n","protected":false},"excerpt":{"rendered":"

Sucker Traps and the Arithmetic of Risk John Hussman has another excellent article out this week but it will be ignored. Mathematically, it must be ignored. In the Arithmetic of Risk, Hussman posted the above chart. I added the anecdotes regarding where we are. Here are some pertinent snips.\u200b At present, I view the market […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[19065,4174,7619,16385,14648,13390,690,4806],"class_list":["post-31884","post","type-post","status-publish","format-standard","hentry","category-economics","tag-arithmetic-of-risk","tag-bitcoin","tag-john-hussman","tag-market-bubbles","tag-michael-shedlock","tag-mishtalk","tag-risk","tag-speculation"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/31884","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=31884"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/31884\/revisions"}],"predecessor-version":[{"id":31885,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/31884\/revisions\/31885"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=31884"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=31884"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=31884"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}