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When the planet has unexpectedly gone into lockdown as a result of a global pandemic, buying habits for toilet paper and, oddly, lentils suddenly ''change''. The fact that there are only three tins of lentils left on the shelf leads you to grab them. The fact that there are ''none'' leads to a nationwide run on tinned pulses people don’t, in normal times, much ''like''. The Contrarian household still groans under the weight of tinned borloiti beans years after the last new variant. | When the planet has unexpectedly gone into lockdown as a result of a global pandemic, buying habits for toilet paper and, oddly, lentils suddenly ''change''. The fact that there are only three tins of lentils left on the shelf leads you to grab them. The fact that there are ''none'' leads to a nationwide run on tinned pulses people don’t, in normal times, much ''like''. The Contrarian household still groans under the weight of tinned borloiti beans years after the last new variant. | ||
There are not just these “cry fire in a crowded theatre” effects whereupon everyone stampedes for the exits at once, but second-order effects. You might not wish to head for the exit: you might be strong-willed enough to rise above the madding crowd — but you might still have no choice. You are not independent when your asthma inhaler is in your spouse’s rucksack. | |||
An investor long “on margin” might wish to ride out a sudden correction by meeting margin calls. In most dislocations this is the obvious and — if you can manage it, correct — thing to do. Such an investor might, per its own books and records, be solvent, well-capitalised and In good standing with its banks. But meeting the margin call means drawing on a stand by [[revolving credit facility]] — who keeps a yard of cash off the table for emergencies? — and it turns out your bank is experiencing a liquidity squeeze. They evoke some buried condition precedent they say is buried in the docs and unexpectedly pulls your lines, or suspends withdrawals, as a result. This is nothing to do with you: this is caused by it's ''own'' market exposure. At the same time your margin lenders — usually so patient with you, generally genial, good for a knees-up at Ascot and tolerant of peripheral looseness in your margin operations — have had a sense of humour failure. They are apologetic, but they are shipping a shower of grief from risk management and have been told to tell you that you today there is no flex, today the money must be there without fail —and for good measure they are jacking up your IM. You tell them this is absurd, that everything is fine, ''but today they don’t know what to believe''. Normal conditions of trust are suspended. This could be the final round. Anything they can’t see unaided with their own naked eyes could be fake news. The one thing they can see is that ''everyone else is running for the door''. | |||
Cash is | The value of all that near-perfect market information evaporates and ''other'' information, which the market ''doesn’t'' have, but until now took for granted — such as the essential viability of systemically important financial institutions — is suddenly ''much'' more important. All at once, no-one fancies “taking a view” on ''anyone’s'' credit. | ||
Cash is King, Queen, Jack and Ace. There are people on the TV in sharp suits wandering dazedly around outside their buildings clutching [[Iron Mountain]] boxes. | |||
All indicators are going one way, across the board, in all markets and all asset classes. | All indicators are going one way, across the board, in all markets and all asset classes. | ||
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Now we find the model we were using has stopped being largely right, or broadly right, or even vaguely right. It is flat-out wrong. | Now we find the model we were using has stopped being largely right, or broadly right, or even vaguely right. It is flat-out wrong. | ||
Advice. If you are the CFO of a bulge bracket [[Vampire Squid]] you will find there is limited tolerance for blaming your performance on a statistical model an absolutely none for blaming it on the essential misbehaviour of the universe, as if your model was right but the atoms and molecules were wrong. Do not say things like: | |||
{{Viniarquote}} | |||
This was not a twenty six sigma event. ''Your model did not work''. | |||
This is a tail event. This is what all the meaningful terms in your legal agreements are designed to protect you against. | |||
{{L1}}The market is generally diversified. If you carve out all the personal idiosyncrasies — stochastic modelling requires — that might explain why one rational person is prepared to sell what another is prepared to buy, it stands to reason that a buyer’s gain is a seller’s loss. In a diversified market, a sudden collapse in value for some traders means an appreciation for others, and all kinds of other effects. See: [[Brownian motion]]<li> | {{L1}}The market is generally diversified. If you carve out all the personal idiosyncrasies — stochastic modelling requires — that might explain why one rational person is prepared to sell what another is prepared to buy, it stands to reason that a buyer’s gain is a seller’s loss. In a diversified market, a sudden collapse in value for some traders means an appreciation for others, and all kinds of other effects. See: [[Brownian motion]]<li> | ||