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Econophysicists Develop and Test "Bubble Index"
eldavojohn writes "Oh if only we could identify the bubble markets as they appear, but with all the random variables, it would take some sort of econophysicist to build predictions for that! Well, a team has released a definition of a 'bubble index' that led them to make predictions of bubbles six months ago that would pop between then and now. The four bubbles they selected were the IBOVESPA Index of 50 Brazilian stocks, a Merrill Lynch Corporate Bond Index, the spot price of gold, and cotton futures. Two out of the four were bubbles, with Merrill Lynch being a bubble already popping and cotton continuing to soar into even bubblier status. Still, for your first try, 50% isn't bad. The team learned a lot of new things from the first run, revised their method, selected their predictions for the next six months, and sealed them. Only time will tell if they are truly onto predicting crashes."
Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.
It's like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.
... in the years after the 2nd world war we used to treat every wild upswing as a bubble and increase the interest rates. Every downturn got a reduction in rates.
It was the same kind of negative feedback that engineers use to prevent oscillation (feedback squeals, for example).
You'll notice it worked. The converse worked much less well.
--dave
davecb@spamcop.net
How many bubbles did they miss?
I'd rather predict 0%. That way I could reverse the predictions and get100%. 50% means a flip of a coin would work.
It depends on what you're predicting 50% of. If you predict 50% of the winners of a horse race, then half the time you're choosing the right horse. You could probably make a living at the track. On the other hand, if you predict 0% of the winners, you'll go broke betting on the other 9 horses all the time.
Now, instead of 10 horses, imagine hundreds of companies traded on the stock market...
If it weren't for deadlines, nothing would be late.
A futures market for Shroedinger's cat? Sign me up for that.
A few other thoughts along those lines: Warren Buffet said, "In the short run the market is a voting machine, in the long run it's a weighing machine".
What's interesting about that comment is that he never said what it weighs. People usually infer that it's the value of the company, since Buffet is a value investor. OTOH, the market might really be weighing a number of other things. It might be weighing how much money you have in the first place, since the rich can afford better equipment and advice. It might be weighing the ping time from your office to the exchange, as we've seen with high-frequency traders. It might actually be weighing your skills, and that last one leads to something else.
Let's say, for the sake of argument, that skillful players really can beat the market. Furthermore, let's say that the top 1 % win and the bottom 99 slowly lose. We would expect the 99 to drop out of the market if they were rational. Therein is a fundamental flaw with economics. It assumes people are rational. This is Greenspan's self professed mistake, although IMHO he also failed to realize that firms aren't people and that the people who ran firms into the ground were behaving rationally with respect to their own self-interest (greed). The people who "believed", CEOs, contrary to numbers, were less rational.
So the way I see it, bubbles will continue for the same reason Las Vegas exists. People aren't rational, and nobody really knows where the wheel will be until we OBSERVE that it has stopped spinning.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
> Only time will tell if they are truly on to predicting crashes.
That and how rich they get betting on their predictions.
Warning: this article may contain humor, sarcasm, parody, and perhaps even irony. Read at your own risk.
50% for a first try is shitty, it's no better then just guessing.
If you mod me down, I will become more powerful than you can imagine....
Yeah, the US is firing up the printing presses and borrowing the value of all the gold in Fort Knox every few months. Gold must be in a bubble. The algos told me. Paper dollars backed by Ben Bernanke's good looks are better than the one thing that has functioned as currency throughout human civilization. The econophysicists have helped the financial elite and the central bankers create a rigged, casino-style market that systematically steals from the middle class, and you're congratulating them for gambling at a 50% success rate? Is this what passes for 'news for nerds' these days? This ought to make real nerds want to puke.
He once inserted random mutations into his code, just so he could have the experience of debugging.
is someone who sees something that works in practice and wonders if it would work in theory. - Ronald Reagean
After logging in slashdot still does not take you back to the page you were on. It's been that way for 20 years.
Could be a 'bubbles' bubble.
Due to irrational exuberance in the bubbles index, and investors massively buying up the bubbles indexes in anticipation of a bubble.
1) Hand out hockey sticks.
2) Wait for someone with a graph and utters the words "like a hockey stick" when describing said graph (usually while wildly gesturing and telling you why X is such a good investment, why you should stick with the company, or why "it is different, this time").
3) Beat that person with the stick from step 1.
4) Sorry, no profit, but less pain; Widows and orphans are spared... At the very least it is good cardio and even if you are jailed, you get free room and board.
This issue is a bit more complicated than you think.
Ron Paul is a crank who likes woo-woo medical practices despite being a doctor.
Schiff predicted eight of the last two crashes.
Both believe in a now disproven philosophy that self regulated entities "know best" - hows that GFC and the Gulf oil spill working out for you?
Can I mod myself -1, Dumbass?
Having a new model/metric to play with is nice. But, it wouldn't have made a damn bit of difference with the most recently departed "phantom value". The core issue is that when people are making a lot of money off a hot economic streak, rich people in particular, there's a strong incentive to not screw with the gravy train. Hell, The Economist, for one, had spent three or four years publishing charts and stories suggesting that the western European/North American real estate bubble was unsustainable, and due for correction.
The missing bit of information was exactly what the corrective signal was going to be. The US Federal Reserve - in the person of Mr. Greenspan - could have provided it, but the Fed board is full of conservative bankers that didn't want to rock the GOP's boat. The various Wall Street bankers could have provided it, but instead they were busy putting out increasingly meta-physical financial products to squeeze another round of bonuses out of the market. So instead, they were all Cosmo Kramer, joy-riding the Saab down the expressway for as long as the fumes kept it going.
It doesn't matter what predictive tool you've got, even the Word of the Lord wasn't and isn't going to stop people from trying to grab that extra [your monetary goal here], if there's any money left on the table.
Luke, help me take this mask off
Witches: Double, double toil and trouble; Fire burn, and caldron bubble.
Investor: Am I destined to be king?
Witches: Meh. We give it 50/50.
What was the criteria for evaluating success? TFA says that the impressive result by anyone's standards is that they predicted a crash in gold, which then was roughly flat for the next six months... There is an entire industry of "quants" attempting to do things like this for banks and hedge funds. Of course, they do not publish their results. If you would like to see what a good classification of bubbles looks like, see: http://dealbook.blogs.nytimes.com/2010/01/27/schillers-list-how-to-diagnose-the-next-bubble/. Note also that identifying a bubble is not always sufficient to profit. Julian Robertson of Tiger Fund famously identified the tech bubble - in '97. He subsequently lost billions betting against tech stocks that stubbornly refused to crash until after he had given up.
I'm on record as having called the dot-com bubble, the oil spike, and the mortgage crisis. It's not hard to predict bubbles. If you look at historical ratios, it's usually clear when assets are overpriced. Historically, the median house in the US sells for 2x to 2.5x the median income. That's about what people can pay for. That ratio hit 4 nationally, and 10 in some states. It was blindingly obvious that there was a housing bubble.
Dot-com predictions were easy. I had a program which read SEC filings for cash and burn rate, and simply projected when the money would run out. This was far more successful than one would expect. I used to get hate mail from CFOs for that.
The problem is figuring out when a bubble will pop. I expected the mortgage bubble to pop about two years earlier than it did. (Arguably, the Fed's cheap-money policy under Greenspan postponed the inevitable.)
Predictions on the debt side are harder than on the equity side. Public policy dominates the debt world. I don't make political predictions, so I can't say much about the current situation. I've been expecting an interest rate spike for years, but instead we've had a Federal deficit spike as money is pumped into the system. Eventually something will give there, as with Iceland, Greece, and other debtor countries. I'm not sure how that will unwind. We may get an interest rate spike and hyperinflation, which is what usually happens when a currency gets into trouble.