Credit Bubble Bulletin

While the damage will be significant, at least much of the Florida coastline dodged a bullet. The surprise drifts 25 to 30 miles west and it’s an extremely different outcome. Yet most people will your investment seriousness of such a detailed Call. Instead they’ll embed the idea of “fear mongering” further into their thinking. The complacency that developed over ten years of no hurricane encounters will become only more instilled.

Surely another dangerous storm caution will be readily dismissed. Heading back to early CBBs, I’ve used a parable of a “Little Town on the River” that appreciated booming growth and success engendered by the newfound option of cheap flood insurance. For the “financial” side, writing flood insurance during an extended drought was as near to free money as one can get about.

It was fascinating, sophisticated and lavishly rewarding. Truth be told, the insurance market was a rank speculative Bubble in disguise. On the true economy side, the building growth along the river run a self-reinforcing generalized financial Bubble. The tiny town that got a lot bigger was wonderful and awe-inspiring. And it all came crashing down when torrential rains commenced and the undercapitalized “insurance” industry rushed to offload flood exposure (into an illiquid market).

As an analyst of risk, I had been struck by an integral hurricane Matthew data point. Apparently, five million new residents have relocated along the SE coast since the last major hurricane back 2004. Therefore the risk of a catastrophic event has increased significantly. Matthew’s near miss notwithstanding, risk shall continue to accumulate so long as affordable insurance is easily available. It was a week to ponder risk, from the SE coast to global markets more generally. There are similarities and important distinctions between property-casualty risks and market risks.

Casualty losses are usually random and impartial. Actuaries may use historical reduction data to compute insurance prices and loss reserves to ensure sufficient wherewithal to pay future harm statements. Market (and Credit) deficits tend to arise unexpectedly and in waves. They may be neither arbitrary nor indie specifically. Generally, those writing derivative “insurance” doesn’t hold reserves against future losses, expecting instead to market and purchase securities (or other derivatives) when essential to hedge exposures. In contrast to the weather, authorities policymakers have the capacity to significantly impact market behavior. Cheap insurance coupled with a decade without a major hurricane ensures a higher possibility of a catastrophic event.

Similarly, eight many years of unprecedented federal government market intervention/manipulation with attendant cheap market “insurance” practically ensures market calamity. Going on 30 years of central banking institutions ensuring liquid and continuous markets have nurtured a huge selection of Trillions of derivatives and unprecedented market vulnerabilities. A historic market liquidity event would appear unavoidable. And Friday from Bloomberg (Sarah McDonald): “Pound Is the Latest Flash Crash That Traders Won’t Easily Forget.” The article summarized some recent Flash Crashes: May 6, 2010: U.S.

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  • 2/5th — 0.8%
  • 3 months back from Clearwater, Florida
  • Stock of capital
  • Unsecured personal loan
  • Marc Pasuco, XTF Market Making, New York

Stocks (“Dow Jones Industrial Average tumbled just as much as 9.2%”); October 15, 2014: U.S. Treasuries (“37-basis-point range during a 12-in period”); August 24, 2015: U.S. 1.2 trillion of market value… erased”); Aug. 25, 2015: New Zealand Dollar (“8.3% intraday”); January 11, 2016: South African Rand (“9% in a quarter-hour”); May 31, 2016: China Index Futures (“suddenly slipped… 10% daily limits”).

And let’s not forget “frankenshock,” the January 2015 dislocation (39% move) in Swiss franc trading as the SNB untethered the swissy peg from the euro. Perhaps traders receive your investment latest Flash Crash. Yet marketplaces have liked a brief storage when it comes to advertise dislocations amazingly. There are nowadays extraordinarily serious market issues to contemplate. Clearly, algorithmic trading has evolved into a major problem across securities, currency, and commodities markets.