Saturday, 12 May 2012

In The Lap of the Big Bang - A Post from 2008

Why Free Market Capitalism Cannot Work; Why It Is Pointless To Reform Something That Cannot Work; Why Nobody Believes In Free Markets Anymore Although We Want To Maintain Appearances; Why It Is Time For A New Equilibrium State

Fractally speaking, all of our existences are to be determined to a major extent by the Physics of the Big Bang.
For financial economists, this is a pretty large externality to have left out of your risk assessments!
And, yet, that is exactly how flimsy is the intellectual rigour underpinning Friedman, Hayek and the Chicago School so mighty in ObamaWorld.
Of course, all other externalities are stripped out of the pricing system too, in order that psychopathic growth may be achieved despite the production of Real Super-Systemic Risk.

Carcinogenic Capitalism.

Occurrences that have already happened, some in the dim and distant past, are affecting the dynamics, trends and movements in the financial markets today.

Behaviouralism and Darwinism are primary drivers of the financial markets and yet such structures as 'Moral Hazard' (where market operators take excessive risk safe in the knowledge that there is no personal downside to such risk) were built into the very fabric of the free market model.

None of this Fractal Mathematics, Psychology of Finance or Behaviouralism has been utilised by regulators, government or the financial system despite such knowledge having been freely available for half a century - Mandelbrot, Kahneman and Tversky published in the early sixties.

Benoît Mandelbrot: "Financial economics, as a discipline, is where Chemistry was in the 16th century: a messy compendium of proven know-how, misty folk wisdom, and unexamined assumptions and grandiose speculation."

Through the provision of a psychopathic regulation-lite template where individuals were rewarded for public displays of their psychopathy in action, we should hardly express surprise that the elevation of such antisocials up the economic, financial and political ladders has produced systemic psychopathy in the atmosphere of the system.
Short-termism leads to a lack of strategy which increases risk.
Refusal to accommodate externalities produces feedback loops that also engender systemic and super-systemic risk.

And while these characters were filling their pockets while we were all still focused on all that smoke and all those mirrors, they were basing their illusion on prehistoric 'science'.

Neo-classical economics is pre-Galilean in its simplicity. Multi-disciplinary it is not!
Then there are the chartists and the technical analysts, believing in their candlesticks and their head-and-shoulder formations, all blinkered to any Holistic Reality but following the same data, the same prices, the same (dis)information, plotting the same lines on the same charts utilising the same off-the-shelf software which, if it were of any Real value, would be being used in a proprietary trading environment for isolationist profit. Actually...
Then came the Idiot Physicists - Econophysicists - to spread disaster far and wide.
Holistically challenged, this new breed of trader possessed all the professional inadequacies of their predecessors but with a new twist - black boxes.
Algorithmic analysis has grown exponentially in the last decade.
Curiously enough, this neatly coincides with the onset of the Permanent Depression which, as we all know, began in 1997, or thereabouts.
Black boxes are perfect for shenanigans.
You feed in the inputs.
You train your black box to recognise patterns in this data.
You mock trade the black box.
You build the black box into your overall trading portfolio.
And cybernetics works, to an extent, but not if any econophysicists are involved it doesn't!

It is all dependent on the quality of the inputs.
There are many additional issues with relying solely on black box technologies for trading including different pattern relevance in different market phases and the impacts of Black Swans, for example.

The key charges laid on the Chicago doormat are damning in their veracity - archaic theory, non-multidisciplinary, no Real risk assessment, unsustainability as a core competency, belief in 'magic' technologies, an absence of any atmospheric analysis and engendering super-systemic catastrophe scenarios.
Meanwhile, our Chicago Economist In Chief, Barack Hussein Obama Himself, doesn't understand the basic concept of the price-earnings ratio, thinking it is termed the 'profit-earnings ratio' in a Friedmanian Slip.
This cannot be a good thing.

Before entirely deconstructing this nonsense, we need to take a closer look at the Real reasons why such a system can NEVER work.
Gosh! This is pretty exciting for a Monday morning, I can tell you :)

On October 19th 1987, Wall Street fell by 29.2% in the biggest daily decline in a century.
The probability of Wall Street falling this amount is 10 to the power of 50.
Mandelbrot: "You could span the powers of 10 from the smallest sub-atomic particle to the breadth of the measurable universe - and still never meet such a number."

Free market capitalism underprices risk.
In fact, it frequently excludes risk from the equation entirely.
The outcome of this blinkered approach to all of our Realities is that, in the words of Mandelbrot: "The odds of financial ruin in a free, global market economy have been grossly underestimated."

October 19th 1987 simply should not have occurred.
The 2008 Crash should never have happened either.
But they did and such Black Swans will continue to blight this myopic system until it is nicely deconstructed and put away in its box, under the bed.

Fractal Mathematics are the key here, obviously.
Butterflies flutter and hurricanes hit mainly Black areas, only to be ignored as an Unreality by government.
Decisions are made, systems developed, regulations changed, globalisation created, insider trading enacted, markets are cornered, monopolies allowed, cartels fragment, the state gets involved, new financial markets are established, private markets and Dark Pools established etc etc etc. Each of these quantums of influence set in process the fractal future.
Every single quantum Reality impacts on the future market price.

Behaviouralism cuts across all these feedback loops as a further fractal input.
As Slavoj Žižek states: "The problem is today when you have chaos or disorder, people lose their cognitive mapping."
Chaos reigns.

Take volatility.
There were more daily swings of 5% or more in the FTSE 100 in November 2008 than in total since the Second World War.
Were the market hyperrealities really more volatile in November or was Mass Psychology at play?
All fundamental, systemic, regulatory and cybernetic fractals are massively disordered by the impact of the Behavioural.
Although listed under their sub-sections of Gestalt or Psychoanalysis or whatever, there is a Darwinian dynamic to the manner in which markets evolve.
This, of course, brings us back to the 'animal spirits - psychopathy' doublespeak.

And this is why super-systemic risk is being so massively underpriced in the financial system.
While all of the free market ideologues and their apologists in the seats of power are shuffling the papers, printing the money, pretending that there is another boom-and-bust possibility in this game yet (which, unfortunately, there probably is) and extending this pretence to the territory of carbon markets and cap and trade schemes, each fundamentally flawed fractally in their Ponzi capitalism, there are super-systemic fractals that might just be worthy of closer inspection.
And not just by climate change scientists either...

Fractals are the most worrying aspect of the whole array of worrying factors that make up the subject of climate change.
If fractals can do 10 to the power of 50 with financial markets when destabilisation takes hold, imagine what fractals could achieve in an eco-system that is no longer in a sustainable equilibrium state!

Mandelbrot: "The two poles of human experience - deterministic systems of order and planning and the stochastic or random systems of irregularity and unpredictability."
The latter of these poles dominate the analysis today both in financial markets and in climate change.
Better frame the argument around the issue of bankers and their bonuses then...

Jean Baudrillard: "These systems, even when they are based on radical indeterminacy (the loss of meanings), fall prey, once more, to meaning. They collapse under the weight of their own monstrosity."

Andrew Haldane describes the inability to judge risk as "disaster myopia" - a lack of awareness of the network externalities in combination with misaligned incentives.
But this is merely the first layer of "disaster myopia".
The feedback loops, the fractals, the super-systemic risk, the quantuming between different equilibrium states would combine in a second layer - more "catastrophe myopia" really...

If free market snake-oil salespeople included the primary and secondary levels of externality in their pricing system, the entire edifice comes crumbling down under the weight of its own "monstrosity", a monstrosity based on inconsequence of intellectual input to the issue at hand.
There is no growth once externalities are built into the equation.
Once one takes the holistics into account, the trickledown effect, already entirely illusory, becomes, instead, a Cinderella-fantastic fairy tale of a neohyperreality.

There is no such entity as a sustainable Ponzi scheme.
And the weight of monstrosity is the gravity.
Every free market capitalist infrastructure is Pure Ponzi - from Albanian peasants to credit default swaps.

And, because the people who have been receiving excessive bonuses for the last quarter of a century made the selfish decisions that they did, even to the detriment of their own lines of offspring (psychopathy again), we are now in what Sun Tzu might have called the Worst Variety of Ground.
The fractals yet to be unleashed, the toxicity still to surface, the mass delusions and engendered mass psychologies yet to spiral out of rationality, will all come to fruition against the backdrop of a super-systemic lack of stable equilibrium.

So, a 'system' that produces negative growth if the externalities are included, produces this deficiency of utility on a foundation that spontaneously combusts repeatedly and fractally due to historical indiscretions.

These foundational externalities have been magnified by the Greed of the Great and the Good of the last centennial quartile.
They tell us that tax doesn't have to be taxing which, in self-application, would suggest that the Great and the Good would be more than willing to return all of their ill-gotten gains so that we all might start to implement a sustainable strategy that just might provide us with the remote feasibility of halting man-made climatic change.

Free market sorts, when still willing to defend their myths, frame their discussions around new regulation and innovation and growth and other words that have no directly Real meanings in our lives.
Free market sorts are enacting massive systemic ructions on the global financial architecture without any methodology or strategy whatsoever.
Big Butterflies produce Huge Hurricanes.
But their big thinking always stops short of being out-of-the-box; big ideas exist within the walled gardens of their illusory system.

We don't need tinkering.
We need deconstruction, thank you very much.
And sustainable negative growth, economic contraction, stopping breeding, the promotion of instincts for freedom, those sort of things...

But, in the meantime, to keep your pecker up, why not wander out into the spring sunshine and anarcho-happy-slap a banker today...

Arghhhh!!! The minutiae! Don't get wrapped up in the minutiae...

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