
Strange Things That Have Been Happening in Financial Markets - swamp40
http://www.bloomberg.com/news/articles/2015-11-12/five-strange-things-that-have-been-happening-in-financial-markets
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roymurdock
> The number of assets registering large moves—four or more standard
> deviations away from their normal trading range—has been increasing. Such
> moves would normally be expected to happen once every 62 years.

This is very troubling. It means traditional models are not working to capture
the market correctly at the moment. It was a leading indicator for the 2007
financial crisis - 3 sigma events happening with increasing frequency that
were ignored because there were profits to be made from poor risk management.

~~~
kazagistar
So the real question is, if you think the market is gunna go down in flames
soon, how do you short... everything?

~~~
melvinmt
You buy an ETF that shorts the S&P500:
[http://www.proshares.com/funds/sh.html](http://www.proshares.com/funds/sh.html)

~~~
Pyxl101
Is there a way to bet that something will grow more slowly than normal? S&p
500 has been growing about 10% per year. How would I "short" it and bet that
it will grow 5%? Can such a position be constructed?

~~~
yummyfajitas
Straddle option on SPY with K=1.05 x SPY today.

[https://en.wikipedia.org/wiki/Straddle](https://en.wikipedia.org/wiki/Straddle)

If you want to get clever and derisk a bit you can also limit your losses in
the tails with way out of the money calls and puts.

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Animats
Strange things happen when interest rates are near zero. Things other than the
cost of money start to have outsized effects.

(One argument for a higher minimum wage is that it might cause some inflation,
which would bring interest rates up a bit and get rid of some of these strange
effects.)

~~~
leaveyou
Higher minimum wage ??? So you want to punish the job creators for being
successful ? Everyone knows that trickle down is the way to go. If it fails to
trickle down you need to "inject" more money into the economy until it
trickles down /s

~~~
collyw
Oops downvoted before noticing the /s (I assume thats sarcasm)

~~~
allencoin
Yes, the "/s" is commonly used on sites like reddit to denote sarcasm.

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mynameishere
_Editor 's note: This article has been updated to include another strange
thing._

Well, I laughed. That's the kind of thing "Cracked.com" won't inform you about
on their "Seven strangest occurrences in the financial markets" list. Hats off
to the Bloomberg Editors.

But interest rates have been steadily coming down since the early Reagan
years, and any reverse is going to be an epochal change. And that's where we
are.

~~~
semi-extrinsic
There seems to have been a push recently, among the news sites who want to be
seen as respectable, to be transparent about edits, updates and even
retractions of articles. I, for one, welcome this change.

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verroq
Can somebody ELI5?

~~~
mynegation
Basically a regime of very low interest rates alongside tighter regulatory
requirements creates things that haven't been seen before. Negative swap
spreads for example mean that investors consider credit risk of swaps lower
than US treasuries, which are supposed to be the golden unattainable standard
of safety. The reason for that is that swaps are collateralized, that is
counterparties in a swap are obliged to give each other money they are owing
pretty much each day so you are on the hook just for 1 day market movement.
Not so with treasuries and faith in US treasury seem to down.

Negative corporate bond inventories happened because new rules make it very
burdensome for banks to hold corporate bonds because of reserve capital
requirements. So bank sell their inventories and because there are many non-
banking financial institutions that seem to have an appetite for corporate
bonds, banks sell even more bonds than they have (being "short").

For the same reason synthetic credit is popular. Instead if holding an asset
(corporate bond in this case) you recreate synthetic position with
derivatives. For example, if you buy a right to buy a bond at a certain price
and at the same time sell a right to sell a bond at the same price, it is
essentially the same as if you bought a bond (bond forward strictly speaking,
but we will omit the difference here).

~~~
dsjoerg
Have you ever met a five year old?

~~~
mynegation
OK, I'll bite. Imagine your mom gives you cookies and everyone in your school
is willing to exchange cookies for other nice things. Lately your mom was
giving you so many cookies that you accumulated lots of them. Your friends now
come to you to borrow cookies more willingly than to your mom, despite her
historically being more respectable cookie provider, just because she might
not have too many left now.

At the same time you friend Tom opened a lemonade stand. He sells cookies with
lemonade and this combo sells especially well. He wants to borrow cookies from
you, promising he will sell a lot of stuff an then will buy and return more
cookies than he borrowed to you (interest).

You see that lemonade stand does very well and you want to do it yourself. But
unfortunately your mom forbids you to do so. So you do next best thing: you
give Tom all of your cookies, and then some more that you - in turn - borrowed
from mom and other friends, hoping that Tom will turn them around and return
even more cookies to you.

~~~
rushabh
Brilliant! That just made me realize that borrowing creates surplus which in
turn creates larger and deeper networks. That works really well for everyone
if supply and demand are stable and no one gets very greedy. But if not, then
things can go bad for everyone.

For example if Tom's stall does not work well, then the "cookie crumbles".
Your mom, of course, being your mom will still give you cookies, no matter you
did not make wise decisions earlier and you will still hold on to your
incumbent position as a cookie distributor even though you don't deserve it
anymore.

This goes on for a while, till people don't want your mom's cookies anymore
because, all their moms have also started distributing cookies generously.

Then a new kid comes to your neighbourhood with an exciting new flavor of
cookies and suddenly it seems cool to be having those cookies. Your mom,
obviously does not like it and tries to out-law or regulate those cookies. But
then, the train has already left the station.

~~~
RobertoG
"Your mom, obviously does not like it and tries to out-law or regulate those
cookies. But then, the train has already left the station."

That couldn't happen while your are living at your mom's house.

Just remember that your mom doesn't accept any other kind of cookies for
paying taxes. OK.. maybe we stretched the metaphor a little too much there.

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theklub
The entire thing has become a joke. It's all fake and manipulated and people
are making tons of cash for nothing.

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shostack
So what should Joe Investor who is not a sophisticated investor, but likely
has a ton tied up in say, an Index Fund, be doing right now?

~~~
godzillabrennus
Cash out. Wait for the bust. Buy back in.

~~~
shostack
And what about if the majority of that is in a 401k?

~~~
hueving
Same applies. Change allocation to cash. Then change back after crash.

~~~
WalterBright
The trouble with switching to cash is then you've got to pay income tax on the
capital gains. You'll be buying back in with less (proceeds - taxes).

~~~
nextweek2
Investment funds will offer a cash investment option. This invests in
currencies. Along with government bonds it's considered low growth low risk
investment.

Nobody would advocate actually withdrawing from an investment account. Just
move it to safer investment options.

~~~
WalterBright
Moving it incurs capital gains taxes.

Even if you passively invest in a mutual fund, the funds internal transactions
show up as capital gains that get reported to the IRS, and you have to pay the
tax.

~~~
spinchange
Not if it is in a tax deferred retirement account: there are no cap gains
incurred by reallocating or NAV distributions unless there's an actual cash
withdrawal. This is specific to 401ks & traditional IRAs only.

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zeckalpha
So... its time to raise interest rates?

~~~
JonFish85
I'm quite curious to see whether that'll happen before the elections...

~~~
uptown
Next month. Bet on it.

~~~
epistasis
What are the best ways to bet on it, in terms of where to put money now?

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use_fed_funds
The actual best way to bet on the event is to use fed fund futures
[http://www.cmegroup.com/trading/interest-
rates/stir/30-day-f...](http://www.cmegroup.com/trading/interest-
rates/stir/30-day-federal-fund.html) which are a futures contract whose value
is determined by the fed funds rate (the rate people refer to when they talk
about raising interest rates)

~~~
nohuck13
Their interesting feature is that you can imply the probability of a rate hike
in December/January/March/... from the yield curve. It's 66% for December:

[http://www.cmegroup.com/trading/interest-rates/countdown-
to-...](http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)

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kator
I wonder if the other factor besides interest rates is the prevalence of
algorithmic trading.

When I see these swings and I hear these "flash events" it reminds me of
extremely fast decisions made by machines based on very small changes.

I'm curious is there an index where we can see how much trading happens almost
unattended on a daily basis via algorithmic systems? I wonder how that would
map against the last decade of "systemic changes" in markets?

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cconcepts
I'm not very well informed on the markets, but is any of this related to the
fact that gold is at a five year low and seems to keep going lower at I time
that (I assume) people are looking for a hedge against uncertainty (what I
thought gold was).

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uptown
Another strange one:

[https://pbs.twimg.com/media/CTqP8JhUcAA3Mwz.png:large](https://pbs.twimg.com/media/CTqP8JhUcAA3Mwz.png:large)

~~~
zeckalpha
Any explanation for that?

~~~
jzwinck
Of course not, that would be ridiculous. It's just a pretty picture made by
cherry-picking years to superimpose and imply...something. Maybe there is some
seasonality, but if you think the two graphs are impossibly correlated, it's
just because you want to see that (and the author chose the data well).

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kmonad
This all sounds important and exciting. But as an outsider, unlabelled graphs
etc leave a lot of meaning to guesswork.

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kenesom1
Good introduction to the importance of fat tailed distributions in financial
markets:

[http://aida.wss.yale.edu/~nordhaus/homepage/documents/statis...](http://aida.wss.yale.edu/~nordhaus/homepage/documents/statisticsoftailevents.pdf)

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kaa2102
Physics has 3 laws that explain 97% of event while finance has 97 equations
that explainless than 3% of events.

~~~
username223
God's a bit better than Mammon at system design ;-).

~~~
PythonicAlpha
Problem only is, that many today only believe (and follow) in Mammon and not
in God any more!

You can believe in God or not, but what is better to believe in, when it comes
to build and uphold communities?

~~~
icebraining
Neither.

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X-Factor
Physical gold is the only reliable asset if the markets collapse in case of a
crisis similar to 2008. It's five years low and good time to buy!

~~~
hliyan
Not every comment mentioning gold is automatically downvote-worthy. In case of
market collapse, gold does tend to have more utility than other assets.

~~~
um_ya
If you're looking for a multiple on the gold trade, look into the gold mining
sector. When gold moves a little, the gold miners move a lot. GDX and GDXJ are
some good basket ETFs. GDXJ is the junior mining companies and has a higher
multiple than GDX. It also works in the inverse too though, if gold goes down,
these go down even more.

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kaa2102
Shorting long-term bonds with high modified duration would yield gains when
interest rates rise and bond prices fall. Black swans and fractals: we can't
predict the future but sometimes Blackswans flock together, e.g.,
autoregression, feedback patters, volatility of volatility, etc.

