When Tail Risk Hedging Goes Bad

Mulling, mostly, but if … you run a tail-risk ETF, and we’re having an epochal tail risk, and you’re only up 15% as said tail … unwinds(?), something may be awry with your de-risking of tails—especially given that the aforementioned gain only brings investors back to slightly above where they were eight months ago. 

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Relatedly: Over the coming weeks, expect a lot of stories about people blowing up while assiduously protecting themselves from blowing up.

Speaking of hedging tail risks, in the worst winter in years, during March break, with traffic off because of virus worries, Mammoth just had a massive power outage forcing it to shut down the mountain and give out rain checks. Wonder which business analyst at Mammoth modeled that scenario out? I’m going to go with “No-one”. Granted, hard to anticipate, but where’s the fun in hedging tail risks if you imagine weird stuff? 

Anyway, when hundred-year storms happen every second Tuesday after lunch, you have a periodicity mismatch. Worth remembering. 

Every Generation Throws a Hero Up the Pop Charts

It’s every generation throws a hero up the pop charts
Medicine is magical and magical is art
– Paul Simon, The Boy in the Bubble (1986)

They were still so young they hadn’t learned to count the odds and to sense they might owe the universe a tragedy. 
― Norman Maclean, Young Men and Fire (1992)

If something cannot go on forever it will stop.
— Herb Stein (1986)

There is a theory that every major financial market crisis marks the end of one big thing, or the beginning of another big thing, or both, or neither. This theory, like most all-encompassing explanations of financial markets, owes much of its value to its carpet-bombing of the rhetorical landscape. 

To this way of looking at financial things, while financial market crises are awful, they at least have a handy explanation … maybe. The crash of 1907? The end of laissez-faire; the return of central banks!1Which arguably led to crashes in 2000 and 2008 The crash of ’29? The end of a decade of leveraged, consumer excess2Leverage that was all back, plus plus plus, by 2008.; the return of probity via the separation of banks and brokers!3Yeah, that separation? Gone now. The Black Monday crash? The end of attempts to insure against financial losses in automated markets; the introduction of circuit-breakers4Most of which are entirely irrelevant now, given that arbitrary withdrawal of liquidity by algos makes market movements more capricious than ever.

The list goes on and on, right up to the present, when markets are crashing once again. What big thing is ending? It’s almost too easy to say, but it seems it’s the end of integration. Free trade triumphalism had begun to fall apart a few years ago, and that trend has only accelerated since, a trend that will further accelerate, however briefly, as global supply chains become less integrated in the face of re-discovered  risks. 

What big thing is coming? Regionalism and fear of the other, one would think. Regionalism in everything, from financial markets, to supply chains, to … well, regions. Ever-tighter economic and social integration has turned out to be not such a great idea given our inability to deal with its economic and health consequences.

And more fear of the other? Well, that seems a given. I remember after 9/11 looking up and seeing commercial jets for the first time and feeling, not pleasure at a return to normalcy, but unease and a kind of epistemic collapse about airlines. They no longer represented what I thought they did.

It doesn’t take much imagination to see that people increasingly feel the same way about one another—as bipedal bags of hidden health hazards, rather than that guy from down the hall who sometimes coughs into his hand. This, of course, would have come as no surprise to, say, wealthy Venetians reversing a recent trend toward wider trade and hiding in their homes for months during the plague waves of 1629-1631. 

The trouble with all these explanations, of course, is that everything in history, especially financial history, is overdetermined: there are many causes for every outcome, and we get far more causes than we do outcomes. Our main realization should be, and I’m merely echoing sociologist Charles Perrow here, is that financial markets crises are normal—in the sense that they happen all the time with the least provocation, not that they are in a way something we should feel good about, leave aside lessening the tragedy as each generation learns the same lesson. 

Here is Perrow: “If interactive complexity and tight coupling—system characteristics—inevitably will produce an accident, I believe we are justified in calling it a normal accident, or a system accident.” What financial markets are very good at is exposing systems prone to systems accidents, especially financial systems themselves.

Whether anyone will learn that lesson, whether we will introduce more slack, less complexity and less integration into our lives is an open question, however. It will eventually stop, however, because it can’t not stop, amirite?


Some readings:

HEALTH
FINANCE & ECONOMICS
SCIENCE & TECHNOLOGY

On Repeating Inconsolable Catastrophes

“Probably most catastrophes end this way without an ending, the dead not even knowing how they died…,those who loved them forever questioning “this unnecessary death,” and the rest of us tiring of this inconsolable catastrophe and turning to the next one.”
― Norman Maclean, Young Men and Fire

Teaching a Dog to Read Music Journalism

In my spare time I’ve been working on some natural language processing tools, one consequence of which is a corpus of music journalism that I’m trying to get it to read and label. Sometimes it does well, sometimes … not so much. This is from a Stereogum article about an attempted coup d’état by Journey’s drummer. Who isn’t really an original drummer, nor is pretty much everyone else at Journey. So, anyway. 

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Tray Bar Thingies ‘r’ Us

I have a lot of things in my main tray bar on OS X, and a bunch more I hide in a second tray. Here are they, in two rows:

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Some of my favorites, in no particular order:

  • Bartender, to organize all the following crap
  • Forecast Bar, for weather
  • Fantastical, the best Mac calendar app
  • ToDoist, for todos
  • CardHop, because I don’t remember who are or where to find you
  • Various iStat menus, mostly to make sure I don’t drive my Mac to its knees
  • Snagit, without which computers wouldn’t be worth using
  • MemClean, because Macs are memory pigs and need to be cleaned constantly
  • SoundSource from Rogue Amoeba, because Macs make it too hard to manage sound
  • Little Snitch, to manage network traffic in and out
  • Rocket, for quick replacement of things like 🙂 with 😄
  • PopClip, which completes me
  • CarbonCopy Cloner, which saves from all of TimeMachine’s screwups
  • TextExpander, because I’m too lazy to type, even when I’m typing 
  • DisplayResX, because I have a bunch of monitors and want all them all configured just so
  • Amphetamine, because Macs have a bad habit of shutting down during something really important
  • Alfred, which does too many things to count, but mostly just makes me magically faster

I’m sure I’ve forgotten a few things, but that’s the gist. 

It’s China’s Capital Market, We Just Live In It

From my friends at Bespoke tonight, China’s rapidly growing share of global capital markets, as everywhere else declines and it recovers (a little):

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Not to put too fine a point on it, but we’re essentially collapsing time here: China might not otherwise have gotten to this share of global capital markets for another decade or more. 

Enjoy Every Sandwich

Enjoy every sandwich, and every minute in playing in the band with the guys, and being with the kids, and everything. Yeah.

– Warren Zevon (on David Letterman 10/30/02)

Normal Accidents and Commercial Aviation

I regularly push Charles Perrow’s work about “normal accidents” on people, and lately I do so more than ever. 

“If interactive complexity and tight coupling—system characteristics—inevitably will produce an accident, I believe we are justified in calling it a normal accident, or a system accident.”
― Charles Perrow, Normal Accidents: Living with High Risk Technologies

It increasingly feels, for example, that global commercial airlines are a good example of such a system—a complex, tightly-coupled system that works spectacularly well until it spectacularly doesn’t, with systemic consequences, both for airlines and for society. 

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And as Perrow wrote, such systems aren’t very good at warning us that they can no longer warn us, assuming they ever could.

“Unfortunately, most warning systems do not warn us that they can no longer warn us.”
― Charles Perrow, Normal Accidents: Living with High Risk Technologies

Understanding

“It is difficult to get a man to understand something when his salary depends on his not understanding it,”

– Upton Sinclair