Que Sera Sera

Bill Gross has done it again in his 2012 prediction. The coverage is impressive with depth and live reference to the current market conditions. I read the article twice, and then I realized what has been bothering me in the current financial patois. This is the phrase “fat-tails” it is quickly replacing “black swan” in popularity. Talk about herd behavior in markets.

In this article B. Gross is moving fast back and forth with this fat-tail talk. It was not a comfortable read for me.  Some of it comes from the real depressing content.

I am trying to bring it together in my mind; this immediate financial past as we understand it and what is to come, all fat-tail driven.

In standard normal distributions bulk of the incidents happen in the main body of the curve. But really juicy, rare happenings are exiled to the extreme tails.  As life goes on, distributions change without any warning, randomness is the operative mode. The main body of the distribution becomes less, as the fat from main body flows towards the tails: Thereby the “fat-tails”. That means that the extreme events happen more often. As the events of 1987, 2000, 2007 showed us brutally. We later decided in retro that we now have better understanding of these events. I doubt it.

After all, the extreme tails suppose to retain some of the characteristics of the initial distribution. I always thought that this is what they mean by claiming that “markets have some memory”. The problem I have been tackling for some time is the process of remembrance. Why and how is it that market remembers?  Why only a tiny, insignificant part of the market remembered 1929 vividly in the summer of 1987.

Even though I have detailed understanding and deep knowledge of memory formation in Computer Architectures as to how memory starts, enhanced and finally erased. I practically have very limited knowledge of memory formation and access methods in my brain and in markets as well.  I am reading Daniel Kahneman, hoping to gain more understanding than ennui, tune in later...    

Higher order moments (skewness and kurtosis) of normal distribution give additional knowledge. But I am not sure we can reliably determine market’s higher order moments. When we are able to do it with some certainty it is too late.

I still like most of what he is saying and probably agree with most of the end results. Yet, I am not sure about the path to that ending. Between now and then there are thousands of possible paths and we don’t know which one will be.  Doris Day was right: Que Sera Sera.