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ChristianKl comments on US default as a risk to mitigate - Less Wrong Discussion
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Comments (120)
I don't think that learning more about finance will put you into a position to be as good as people with a lot of inside information about Washington at understanding it.
I would guess that most of the information that you have about the fiscal cliff comes from the media. You are competing against people who are much better informed than you.
The banks might be irrational because they suffer from availability bias, but what do you think do you know that they haven't factored in their analysis that outweighs their huge information advantage of inside information?
Can you estimate the utility cost of that strategy if you prediction of a crash turns out wrong?
Perhaps, but I'd be wary about assuming that the average Wall Street figure with inside information on Washington is setting a good example for how to operate rationally on that information. The impression I get from the books I've read discussing the work of Wall Street insiders is that they are, on average, quite good at operating under "business as usual" conditions, but that those who are well calibrated for events outside of the norm are very much in the minority. Prior to the fact, we are probably not in a good position to identify who those well-calibrated people are.
Inconvenience. Risk of being robbed. That's all I can really think of. Why, am I overlooking something obvious?
Can you put a number on it? How much money would that kind of inconvenience be worth?
Maybe $50 tops?
Update. For a more ambitious strategy of storing purchasing power as silver bullion, it works out like this:
Spot price as of now, about $21.21
Spread: about $2.25
So if I bought for $21.21 + half the spread, I'd pay 22.36/oz, and sell (in the event of no default) for 20.11, so about a 10% loss on whatever I invested. Probably more, given the small volume I'd probably be buying. On the other hand, I'd need that 10% a lot less in the absence of a default than I would need the inflated purchasing power of that silver if a default did happen.
If you hold fixed-rate debt (ie, mortgaged house), hedging against inflation is overkill. Just enjoy paying off your mortgage with inflated dollars.
Only if I'm still employed and the checks I get still clear.
Moreover, we're talking about a worst case scenario. There can be no overkill. I have to take every opportunity and exploit it to create greater opportunities until those I am responsible for are no longer in immediate danger (or at least the greatest risk to them again becomes old age, at which point my efforts no longer need to be split between the two problems).
So if I end up with surplus buying power, I should find something to invest in. I keep reminding myself that a recession can also be a great buying opportunity if you can manage it.
Another low probability risk would be a house fire, though a fireproof safe might be a good idea.
This rings true, but I instinctively play devil's advocate. You are essentially saying that the overall behavior of the market is driven by the decisions of a few insiders. The complementary scenario is that the market generally responds to widely available information, and that even though insiders can exploit this, there are not enough of them to actually drive the market. What observable features would you expect in a insider-dominated market versus an approximately-rational (boundedly-rational?) market?
Okay, some (anecdotal) evidence now in and it looks to be in support of... both models?
The insider-driven model you propose would predict that there would be a negligible reaction of the market to announcements of a deal trickling in this morning because the insiders would already know how it would go and would have traded accordingly. The non-insider-driven model would predict a rally after the deal was announced.
What we are seeing is W5000 (Wilshire 5000 index) closing last night at 18141, opening today at 18254, and rallying at just before 10am, when the first hints of the impending deal got on the news, to 18322 and staying roughly steady after that. S&P and NASDAQ behave similarly. So from last nights close to when this morning's rally tapered off it gained 181 points. Of them, 113 were gained in after-hours trading, presumably by insiders. The other 68 were gained in trading during the 10 minutes after the news first broke. So, if we do a naive estimate, 68/181 = 38% of the movement it attributable to traders with access to the same information you and I have. So if I'm interpreting this correctly, and if this one datapoint is a representative one (two huge ifs) then insiders do drive stock prices, but the influence of non-insiders is not negligible. That in turn implies that it is not hopeless to turn a profit trading ETFs.
Again, all this is on one datapoint and should not be taken at all seriously, but this might be a framework for how to actually test the insider theory on a larger dataset.
Also, this may imply that the insiders (at least the ones whose actions are observable in this time interval) did not have more than about 18 or so hours notice.
If there is an even earlier group of insiders, the data (try zooming out) might be consistent with one or more of the following from there not being sharp rallies earlier:
There are too few of them to stand out over the noise of the non-insiders
They did not get their insider information at the same time and no individual one of them was large or greedy enough to trigger a rally.
They had automated orders that would be triggered only under certain conditions.
I thought of one.
An insider-driven market anticipates legislation with major economic implications. A non-insider-driven market reacts to legislation with major economic implications. So if we see how the market acted during previous hotly contested congressional decisions, we should be able to infer if and to what extent it is insider-driven, and maybe even get some clues about what sectors most insiders are in, and what branches of government are feeding them information.
I think Goldman Sachs has both a lot of financial capital and good beltway inside information. The same goes for the other big banks.
Curious what you think of this post on discourse.net.