No More Computer Models
By Melvin J. Howard
The Bank for International Settlements [BIS] is reporting Derivatives traded on exchanges surged 27 percent to a record $681 trillion in the third quarter of last December. The amounts are based on the notional amount underlying the contracts.Investors may have shifted some trading to exchanges from the over-the-counter market to reduce the risk of counterparties defaulting on deals, the BIS said. Even banks do not trust each other capital is evaporating off their balance sheets like evian water at fashion week in Milan. To the point of they cannot or will not lend to each other overnight. Now there appears to be counterparties defaulting on derivative deals. Given that derivatives are ten times the global economy this is going to be a bumpy ride for all of us. The Credit Crunch has been driving the derivatives market. Now its panic, it’s like who touched it last your it.Now the Fed is asking the banks to show how they assessed the quality of the home loans underlying derivatives such as mortgage-backed securities and collateralised debt obligations (CDOs).
To me the problem seems to be quantitative funds, meaning that the trades are determined by computers and complicated mathematical models. Some quant funds are completely computer driven. This is not to be confused with Qunantumnomics which is the human interaction with reality i.e life. Anytime you leave out the human element on any calculations, charts, graphs or studies. You risk the unknown factor of what if, what if the technology is off by a ½ point well if you are leveraging a couple of hundred billion you could be in the crapper! I have never been comfortable with quant funds to me its just like when you are flying on an airplane you know the plane is on auto pilot but you still want to see that captain and crew at the controls. Imagine opening the cock pit door and seeing the plane driving itself there would be pandemonium.
That is exactly what is happening now except we are all on the same plane called flight Trillions of Trillions of Dollars now departing destination unknown and no body is flying the plane. They labeled Long-term Capital the Genius of all Genius’s of funds how could it go wrong well you know what happened. You are only a Genius’s until something goes wrong. Bright, brilliant good head on his shoulders yes. But when you label someone genius you are setting them up for a fall. This according to Quantumnomics will happen.
Because the universe is at a constant change even as the time you took to read this entry changed has occurred all around you. What I hear a lot of people say is I like the good old days I wish things stayed the same. They have no idea it will never happen physics is against them. What is here today is gone tomorrow love changes, places change, people change their minds. We change clothes, we change shapes and sizes what is in now will be out tomorrow. New laws are enacted old ones are taken off the books it goes on and on. Computers are tools we humans forget that sometimes all it takes is to have a master crash and we will remember real fast. It has made us lazy to get to the truth of things because getting to the truth requires work and thought. Case in point the wrongly convicted sitting in jail worst some were executed. We humans sometime think we are so smart but we are only human. Karma is just another word for Quantum Physics and by the laws of the Universe you cannot fool it. It is a mirror of your thoughts no matter what you are telling the public.
Now here tell Moody's, Fitch, and the S&P models were flawed. Let’s not forget trillions of dollars of mortgage backed securities were rated by "the big 3" credit rating agencies based on flawed computer modeling. Should we start burying money in the backyard again like our grandparents did in the 1920’s?
