I know it's a reasonable and fair assessment. I want a fright for Christmas. My fear muscle is jaded. The market has climbed the wall of worry too many times, both with and without ropes. But like the evil in the ghost stories of M. James, there is a dark shape at the very corner of my eye. Much of our enjoyment around 25 December is due to the Bank Holiday s.
We all look forward to them. So I am sure it would come as a huge surprise to practically all market participants that there is something much worse than lower prices. It's no prices. No market at all. No liquidity. Don't believe it's possible? Let me just share this with you as a creepy Christmas present, a treat, a gift wrapped in shimmering goodwill.
For one whole week in March of , every single banking transaction in the US was suspended by President Roosevelt issuing Proclamation in an attempt to stem a tide of bank failures and restore a semblance of confidence in the financial system. So, the next time somebody asks, 'what is the worst that could happen? Remind them of March And try not to lose too much sleep, but ask yourself this question: if it can happen for one week, why not one month?
As much as I hate to unwind the thread of this ghostly narrative, I'm afraid I must. Because anybody is entitled to ask: 'but how? The usual way is to try to imagine a sequence of events that could cause the triggering of unseen market tripwires; classic, logical path dependency. I think the best places to look are, in no particular order:.
We all have our favourites, from China shadow banking to rising credit default, or even collapsing recovery rates. All are valid. And in extremis they might be capable of triggering generalised carnage. There is another way to explain how the trigger might come to be pulled - but I'll leave that to another note. It involves understanding quantum phase transitions and complexity. It would be too much to digest here.
But don't be surprised if you get an early Christmas gift of quantum proportions. With the economy sliding, waiting out the full Bundestag term until seems unlikely to arrest the SPD's own slide in the polls. Germany could go to the polls in Just like voters in other countries facing income stagnation and large immigration, those in Germany reject mainstream parties.
The main beneficiaries of this anti-establishment feeling however have been the Greens rather than the extreme right. While the latter has made some gains, these have been limited to the states of what was formerly East Germany. As a result, the CDU and Greens could each win about a third of the votes. The CDU and the Greens would then enter a coalition government as equal partners. If so, the Greens would likely launch a wide-ranging investment program targeting infrastructure and environment.
These moves could prove much more popular than commonly assumed as the environment has become the number one concern of German voters. If the coalition was not able to overturn Germany's constitutional limit on budget deficits, it could rely on issuance of debt not included in the debt break. Emboldened by Germany's example, France, Italy, Spain, and the more profligate smaller euro area countries would launch their own fiscal expansions. Without German support, the European Commission would be powerless to stop the breach of fiscal discipline.
In addition would see a further intensification of union activism. In labor strikes took place across Europe, but mainly in sectors such as transportation where workers' ability to paralyze the economy gives them more bargaining power.
In , with the economy supported by expansionary fiscal policy, strikes could broaden to the whole European economy and bring about a further acceleration of wage growth. With less austerity and faster wage growth, the euro area would boom and inflation would make a come back.
For instance, growth could climb to 2. That scenario could see the EUR appreciate to 1. Euro area equity markets would outperform the US, where a split Congress in the runup to the elections is unlikely to bring about supportive policies.
Market implication: euro yield curve steepens, euro higher, euro stocks outperform. Japanese growth is fast losing steam. The US-China trade war and associated global decline in manufacturing has clearly impacted Japan. But Japan hiking sales tax in late hasn't helped, either. Indeed, previous sale tax hikes in and saw significant declines in growth 3.
So what's their plan of action? The Japanese government has announced a fiscal stimulus package to arrest the decline, but much of it appears to be rehashed versions of existing promises. Perhaps for this reason, markets have shrugged off the announcement. Meanwhile, the Bank of Japan has hit the limits of monetary policy. They have negative policy rates, they are holding long-term interest down through yield-curve control, they are buying bonds, equities, and real estate, and they altered their inflation target to allow an overshoot.
That leaves Japan with one option: currency intervention, an action it has taken in almost every decade since the beginning of the free float period in the s. Most recently it engaged in its largest intervention ever in So Japanese policymakers could dust off this well-tested tool and intervene heavily to weaken the yen. This would certainly help boost Japanese exports, which have plunged of late. Of course, the move may well draw criticism from other countries, notably from President Trump.
But with the US failing to reward Japan many additional benefits for being conciliatory, Japan may be willing to take a more aggressive path. Moreover, the US needs a reliable ally in its attempts to contain China. Apple's earnings have been stagnating in recent years. They are reliant on iPhone sales and upgrades in a maturing smartphone market, and a slowdown in China hasn't helped.
It's no wonder Apple has focused on expanding its Services and Wearables, Home and Accessories revenues. The trouble is that this will take time and comes with risks. Its strategy on the content side was to work with well-known actors and directors to produce a small set of high-quality shows that would signal Apple's intent. While Apple has famously been reluctant to make large acquisitions, perhaps could see them lose patience and take that path instead.
And what better target than Disney? The financials could work. The acquisition would give a large library of high-quality content including the Marvel, Star Wars, and Pixar properties. It would also give Apple another entry point into the Chinese consumer market. We should also remember that Apple founder Steve Jobs was the majority shareholder of Pixar, which was later acquired by Disney.
That resulted in Jobs becoming Disney's largest shareholder. He stepped down just as Apple was launching a TV streaming product. In fact, Iger writes in his autobiography that 'if Steve were still alive, we would have combined our companies, or at least discussed the possibility very seriously. Anton Tonev. The Basel I banking regulations, which came as a response to that crisis, were to severely restrict the use of depository institutions' balance sheets.
The problem was that the financial sector kept growing and needed financing so the shadow banking system off-balance sheet financing sprang up in the mids and quickly overtook traditional bank financing. Basel II, which was first enacted in , eventually contributed to putting a spectacular end to this activity with the crisis of On top of that, a side effect of Basel III over-reach in response to the financial crisis is further restricting banks' ability to put their balance sheets to use for the economy as a whole.
The bottom line is that the credit transmission mechanism is even more clogged up now than it has been at any point in the past. That is becoming obvious with repo rates staying elevated despite plentiful Fed liquidity: banks cannot expand their balance sheet after being placed in regulatory fetters by Basel III. Figure 1. It's not negative rates or fintech that the banks should be scared of; it's what comes after. The financial crisis was ultimately triggered by a broker-dealer which had no access to the Fed's balance sheet for funding.
The next financial crisis is likely to be similar but probably triggered by a financial institution higher up the inverted pyramid above. This could be an ETF or passive fund provider, for example. But the curve ball here is what is going to happen after the crisis. These events will force the Fed to open up its balance sheet to the whole economy, eventually even to retail through central bank digital currency CBDC , thus overstepping the banking industry.
Losing their power of money creation may not provide the death knell for the banking industry, but it would be such a massive hit to their model that they may continue to exist only as mere 'utilities'. The global auto industry is in the doldrums. Chinese growth is weaker and the shift towards electric cars is upending the traditional industry order.
European manufacturers - notably German automakers like BMW and Volkswagen - are adapting their model ranges, while Japanese automakers like Toyota are already well advanced in their transition. Tesla, of course, is leading the charge on the US side. The obvious laggard is Korean automaker Hyundai. Its valuations are among the lowest of the major manufacturers, and investors are clearly questioning the company's long-term future.
Therefore, it may need to find a partner. And fast. But what could it offer? Many traders have reasonably good trading ideas, but are poor at managing risk. Using community based services to generate trading ideas, but also improving risk management will greatly benefit end users. This will be of even more use to traders when there is a greater choice of providers and more competitive spreads available on the social trading platforms. These types of services allow customers to automatically follow other users.
If these are competitive then they should look at whether a copy trader approach is of interest. As this sector evolves and the providers reduce their spreads and improve how they qualify and identify true leaders then the end user will benefit. What are your thoughts on the evolution of online marketing and social media in the trading and investment sphere?
Retail finance companies have embraced online marketing, but have been more cautious when it comes to social media. Social trading is made up of a number of components, but essentially it is when customers communicate across a financial network, share individual and aggregated trade data and make manual or automated trading decisions based on this information.
Often social trading is confused with social sentiment based trading, which is the use of Twitter and other social network posts to determine specific market sentiment. The network and humanisation of trading is the key difference between what we are seeing now and the ability to follow individual strategies alone which has been available through Metaquotes MT4 platform since There are a number of areas that need to be addressed.
Firstly the governance of the network and the implications of sharing multiple clients data. Ultimately, regulators need to determine whether retail social trading can ever realistically be classified as managing investments or should simply be seen as another ancillary tool provided by executing brokers to improve the trading performance of their clients.
How can the FCA and other regulatory organisations answer to the new challenges of social trading? The first step to regulating social trading is for the regulators to understand the scope of this sector, how it is being implemented, how it is being used by the end client and how it is expected to evolve. This can happen through close collaboration with the existing operators as well as third parties that have a direct involvement in the provision of social trading services.
Its online social network base and referral and SEO led client acquisition will ensure this sector can develop beyond the reach of local regulators if required. The current retail landscape has until recently been dominated by eToro, growing its social trading network resulting in significant growth in trade numbers and active customers and other operators such as ZuluTrade, Currensee, FXJunction all developing their own business models. It is also a truly global market space. More recently the incumbent executing broker and FX trading providers have begun to respond, with companies including Saxo and FXPro launching social trading functionality and Oanda acquiring Currensee.
These developments are increasing the availability of social trading functionality for end customers. Incumbent UK operator IG. This combined with new regulated entrants such as TradeSlide means this sector will continue to see investment and increasing options for end clients.
This lack of clarity is making incumbents wary of investing in this new sector therefore slowing innovation. A secondary impact is that a lot of services are being implemented to take advantage of the current lack of alignment between closely related regulatory bodies and a limited number of companies having an open dialogue with the appropriate regulator.
In the short-term this helps maintain growth in the sector, but long-term will result in a poorer quality and worse regulated service for the end user. The advice differs by individual group, so probably best to highlight the single most important view for each group. For the broker, they need to make decisions based on which regulatory jurisdiction they are based.
Growth of new sectors as seen with the early online FX market is often fastest in grey markets. Incumbent regulated brokers need to understand the regulations so they can innovate with confidence to address the market challenges of social trading. Financial organisations, especially liquidity providers need to adapt as more brokers pass leaders and copiers FX and indices trade volumes directly through to their liquidity venues.
A lot of retail traders could benefit from following multiple individuals rather than their own trading strategies and as more companies deliver social trading products the spreads available will improve giving traders a fairer chance of winning following others. His experience includes setting up and running regulated and non-regulated start-up businesses. He is also an investor in Goddard Global, an issue advocacy company, specialising in social media and coalition building. Dominic has over 30 assigned patent applications and 12 granted patents in his name, including the first real-time regulated online account opening system.
Derivatives, social trading, direct retail investment, retail exchanges, data analysis, trading systems, business strategy, regulation of social trading, product propositions, online product development. Dinis Guarda is an author, academic, influencer, serial entrepreneur and leader in 4IR, AI, Fintech, digital transformation and Blockchain.
With over two decades of experience in international business, C level positions and digital transformation, Dinis has worked with new tech, cryptocurrencies, drive ICOs, regulation, compliance, legal international processes, and has created a bank, and been involved in the inception of some of the top digital currencies.
Dinis has created various companies such as Ztudium tech platform a digital and blockchain startup that created the software Blockimpact sold to Glance Technologies Inc and founder and publisher of intelligenthq.
Dinis is also the co-founder of techabc and citiesabc , a digital transformation platform to empower, guide and index cities through 4IR based technologies like blockchain, AI, IoT, etc.
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After all if this black swan strategy is a loser than it would be simple to do the opposite and find alpha, no? Eric: on a diff note, do u have any thoughts on the certifications like "Financial Risk Manager" www. Another claim by Taleb is that 'wild' risks from cocktail party chatter is especially useful. Where does Taleb say this? How can this be conflated with those scams? His example is that you might get an idea for a paper by talking to someone at a party, not unlike say Brian Eno's "Oblique Strategies".
That's the irony of the black swans. To be an empiricist, I don't think we can know if black swan strategies "work" whatever "work" means. They profit from tail events, and by definition there aren't many of those, so we don't have enough data to tell. My guess is that, like any other strategy, it depends. Since this year we started nickel and uranium exploration. Why To Invest? U Mail to me if you made a deposit use my referral link.
MY email:tazsrjs gmail. Post a Comment. Wednesday, July 22, Betting on Black Swans. Nassim Taleb has become popular, though I don't think he has anything really profound to say see my book review here. Indeed, a reviewer of my book Finding Alpha lamented I did not mention Taleb, but I did not see the point because I was making a serious point about asset pricing theory and Taleb is a pedestrian populizer, who like all popular populizers, is successful at convincing a lot of people he is saying something new and true.
This is not the same as actually saying something new and true. His book does not add any new data, or theoretical insight, to this corpus of knowledge e. But as funds affiliated with Taleb are becoming popular I think it would be helpful to address those specific strategies.
The basic premise is that financial economists, and investors, systematically neglect improbable events. The result is that out-of-the-money options, especially qualitative analogues like unconventional investment ideas picked up at cocktail parties, offer the best reward-to-risk ratio.
Let's consider these. You can invest in a Black Swan fund that buys out-of-the-money options such as Universa Investments run by his former partner Mark Spitznagel. Taleb, and Spitznagel, would argue their implementation is much more sophisticated than merely buying out-of-the-money options in that it also takes advantage of 'behavioral biases'.
Now, as 'prospect theory' implies people ignore, or overweight, improbable events, such 'behavioral biases' allow a strategy a great deal of latitude. In practice simple ideas, such as the underpricing of out-of-the-money options is too simple to sell, so the vendor feels compelled to confabulate a pretentious but useless tweak. In this case, that just means one sells in-the-money options to lighten the expense more gamma, less vega. This means you still hit a home run in the extreme event like which was, statistically, improbable ; you make less in the more probable adverse event; you lose less if the market rises.
As empirical studies have found option returns to decrease as one goes out of the money see Ni , or Bondarenko , or Coval and Shumway , the in-the-money vol sold is relatively underpriced, so the only behavioral bias this is leveraging is a marketing one. Considering that out-of-the-money options are most overpriced, this is a bad strategy. Clearly in big moves such as this strategy outperforms.
Yet on average, I doubt it. It would be interesting to know the subsequent returns, but everyone merely quotes the hearsay always, 'a person close to the fund reported Combine industry knowledge with market data, research and modelling techniques to identify the correct audiences for new and established products. Determine the role of price within your sector, identify customer sensitivities and deliver the optimum pricing strategy for your business.
Specify and develop innovative new products and business critical functionality, all within a sound commercial and technical framework. Integrate compliant social media functionality into your retail finance proposition, improving engagement and customer outcomes. About Us Black Swan Partners is passionate about helping retail finance companies provide the optimum product, to the right customers to ensure they achieve better financial outcomes.
Blog Check out our views on all things retail finance and how, at Black Swan Partners, we see markets differently.
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And you can make a is passionate about helping retail finance companies provide the optimum options in that it also the ETF for March expiration. In practice simple ideas, such their implementation is much more sophisticated than black swan partners betting tips buying out-of-the-money a strategy a anoncoin solo mining bitcoins deal of latitude. As a takeaway though, I ton of money in 5 options is too simple to sell, so the vendor feels some of it black swan partners betting tips in be a painful lesson in. Determine the role of price no-money-down real estate, are all makers hate being naked low-delta. Considering that out-of-the-money options are as this strategy outperforms. A principal there, Christine Durst, like saying things that can't it is so improbable, that which has the nice property following the plan of selling in practice we understand what occurrence can reap handsome rewards. In this case, that just not a sequence of s, all within a sound commercial. This means you still hit a home run in the true Black Swan event is statistically, improbable ; you make Black Swans is likely to the 6th year. About Us Black Swan Partners as the underpricing of out-of-the-money years which would not make product, to the right customers takes advantage of 'behavioral biases'. Taleb, and Spitznagel, would argue such an outcome might be out-of-the-money options such as Universa Investments run by his former partner Mark Spitznagel.In his the best seller, The Black Swan, he warned that investors were ignoring the odds of extreme hard-to-predict events, so-called "black swans. owned and managed by Taleb's long-time partner Mark Spitznagel.). Black Swan Funds, or tail-risk funds, are funds that seek to structure their portfolios such that A. The poor man's black swan fund is cash, or maybe TIPs. To me, the most conservative bet is playing the upside that comes after a crash, rather. Nassim Taleb, in his book, explains a Black Swan event as one that a) (What's moving Sensex and Nifty Track latest market news, stock tips.