Thank you Steve, and especially Eric. As I study new economic models for the real economy, such as the "circular economy" and the "doughnut economy", I am also paying more attention to the financial economy and especially the wild and wooly stock market. I know it's unsustainable, but my hopes are constantly dashed every time I think it's going to crash and it demonstrates its robustness once more.
On Sat, Jan 30, 2021 at 10:56 AM Steve Smith <[email protected]> wrote: > Eric - > > You lay this out so well. > > Some random observations. > > 1. Minsky's Ratchet is very compelling as an explanation. As we know > I'm a sucker for understanding by analogy with mechanical technology as a > common source domain. I *think* Minsky's Ratchet is a correlate of what > you later call game-of-chicken gambling? It was the first applied > (discrete) math problem I remember being offered at college... that among > the myriad "rich-get-richer" mechanisms, the "empty pockets ratchet" is a > big one... a fair game generates a random walk which ultimately ends when > one players pockets are empty... the smaller pockets (esp. by orders of > magnitude) almost always go empty first. "It's ratchets, levers, wheels, > and connecting rods all the way down?" > 2. I was caught off guard by your coining "an oligopoly of little > fish", my usual binding of oligopoly to "a small number", but your point of > course, and the crux of the event, is that the "little fish" schooled > effectively, as if an apex predator-shark wandered too far up the Amazon > and encountered a school of pirahna. The culture-war story, of course is a > combination of the "underdog" and the caution of the potential of > "collective action"... as you point out, this one encounter may indicate > that a few sharks may yet get stripped of flesh by schools of tiny fish, > but there is no indication that they will lose their niche in the oceans > and reefs to such. > 3. Your tentative analysis of EW and AOC also really struck me as I > (contingently) hold them both up as culture-war heroes to the underdogs I > regularly cheer for. I don't feel I have my own dog in either of their > fights, but the larger culture I want to live within (with various forms of > assertive equality and equanimity) is the one I try to support as best I > can. I am more implicated as a cause of their causes than a victim. > Understanding EW and AOC more better seems to me to be important in > pursuing my aspirations to undermine my own undue advantages. I suppose I > "expect more" of EW as a veteran, as a scholar, as a senior statesperson, > and I accept AOC's decision to play to her strengths (emotional appeals in > the culture war) but also appreciate her having a little deeper > intellectual stake (BA in Econ?) than her affect/appearance suggests. I > understand (but do not sympathize with) the olde guarde in congress being > acutely skeered of getting double teamed by AOC and Katy Porter. I look > forward to more of those "wild kingdom" takedowns on CSPAN. I don't think > badly of EW's role/position, just disappointed that she might not be > achieving her full potential? > 4. Your practical description of the "pyramid scheme" and "exhaustion" > are a very good thumbnail for where I think this is going myself. I > suppose there IS a chance that a new species of oligopolist will emerge in > the form of swarms (school, flock, pack, ...), but I don't think we are at > the edge of a phase change yet. I'm not sure if all significant radiation > events are paired with extinction events? > 5. Someone made a slightly different correlation than the COVID > stay-at-home free-time-to-conspire on Reddit with a COVID > stimulus-check-in-hand free energy(cash) one. Anecdotal at best I'd > guess. > > 'nuff for now, > > -Steve > On 1/30/21 4:19 AM, David Eric Smith wrote: > > So I have been watching this, and it looks just like one more > wealth-concentrator on the long term, with smaller shifts in the short term > that people get caught up looking at because they involve personality > conflicts. > > Will somebody tell me where I am wrong in the following? > > 1. We start with the usual state of affairs, in which hedge funds of various > sizes take short positions; in what and how much depends on the capital they > hold to cover the short, relative to their other options. They are “big” > actors, in the sense that decisions of individual firms can involve > moderately large amounts of money. They assume they are the full landscape > of big actors, and although they act with cognizance of each other, since > they are all using similar research, they do much the same thing. > > 2. A new “oligopolistic actor” comes in that changes the landscape of > participants, which is a group of Reddit-coordinated little fish. They can > put a short squeeze on the hedge funds. Those that took too large a position > either with too little capital to cover the squeeze until it bursts, or with > too little interest in this stock to be willing to take much of a loss on it, > will sell off at a loss, and the various little fish will make a little money > each, but it will look like a decent chunk when you take them together. The > smaller or medium-sized hedge funds that can’t wait this out could be forced > into low enough overall returns that their clients will want to withdraw from > them, putting them in further trouble, perhaps driving some of them out of > business. > > 3. Meanwhile: the oligopoly move is an ordinary pyramid scheme, and it only > works as long as the pool of new buyers remains large enough to pay off the > earlier buyers surfing the bubble. Considering that relief and unemployment > checks amounted to many hundreds of billions of dollars, if even a modest > amount of this is in the hands of the young men who were gamers and are now > stuck at home, it can look as if that bubble can continue to inflate for a > while. We might even be able to estimate, however, from the overall amount > of free money spent into the system, and the part of the public that this > young-male demographic accounts for, what the potential size of total > gambling capital is for this thing. > > 4. While attention is on the oligopoly of small fish, and the unprepared > mid-sized or small hedge funds that might go bankrupt, there are always > larger actors who are well capitalized and can wait out bubbles. They may > not have taken positions in this before, when it wasn’t all that interesting, > but now seeing that there is a bubble afoot, they had a reason to get in and > go short early. They can outlast the short squeeze, and have a reason to do > so because of point 5 (next): > > 5. The pyramid will end when the new buyers are exhausted, and that will be > the end of any power for the little-fish oligopoly. At that point everybody > who is leveraged will be underwater. Because a lot of this money was in > options, the unwinding will be very fast, much faster than if it were just > driven by a sell-off of the underlying. The last wave of buyers in will lose > essentially whatever they spent. Whichever little fish happened to get out > of the bubble before that will collect some of the money from that last wave, > and the larger hedge funds who were waiting out the short squeeze will then > collect the rest. > > > So, when the dust settles, the net effect? Some money will have changed > hands in a quasi-random way, from many small fish who gambled the rent and > couldn’t afford to lose it, to a smaller number of other small fish who will > collect at varying multiples, but still not enough to meaningfully alter > their life trajectories. The Reddit board-makers might collect enough to > happily go on to the next scam, but they will not be breaking into any Forbes > lists. However, in the net, there will have been a flow of money out of both > the oligopoly of small fish and the small or mid-sized hedge funds that > didn’t see it coming, and into the wealth of the large funds. In addition to > the direct winnings of the large players, because their returns to their > clients will go up, they will collect new clients that jumped ship from the > hedge funds that bought back out of the short squeeze at a loss. > > So the macro-thing that will happen is the macro-thing that happens through > every other mechanism: whoever has the most capital can wait out the largest > spectrum of risks, and will on average gain more capital. This is the > ratchet that works through everything. It is not a Fama-French efficient > market mechanism, because it works through differential action of > constraints, not through Arrow-Debreu “complete” price systems. It is not > quite the same, but still related to, the bubble-bailout cycles that I have > termed Minsky’s Ratchet, from the arguments made by Hyman Minsky in > Stabilizing an Unstable > Economy.https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997 > > > For AOC to be seeking media attention, when there was an early trading > freeze, to criticize the hedge funds for looking for protection against the > oligopoly doesn’t surprise me, because this is a culture-war thing and > responding in the moment to that is what she does. But for Warren > (Elizabeth, not Buffett) to allow that to be her caught-on-camera moment > surprises me, and seems regrettable. Yes, EW is as motivated as AOC to > criticize the use of access by the hedge funds to seek protection when they > get beat at their own game, and both are right to mock them and welcome them > to go under. But EW’s career has been about how the ratchet of unequal > capital constraints moves capital from the small to the large, and if what I > said above is correct, I would assume this would be the biggest picture in > her view. In the long term, the people who will get hurt mainly are just the > people she has made a profession of trying to protect. I would think she > would want her on-camera moment to be about not getting distracted from that, > and worrying that, yes, market regulations and taxation that encourage > game-of-chicken gambling are The Urgent — and structural — Problem. Whether > some gambling hedge funds get caught and go under is a sideshow. AOC, too, > of course is plenty smart to understand all this (if what I have said above > is not wrong), and I expect she probably does. (She was an econ major in > college, right?). But her media incentives are a bit different, so for her to > mostly emphasize the culture-war thing doesn’t seem strange. > > So is the above roughly correct? Or do I misunderstand the structure badly > enough that I am drawing the wrong macro-conclusion? > > Eric > > > > On Jan 29, 2021, at 6:45 PM, uǝlƃ ↙↙↙ <[email protected]> > <[email protected]> wrote: > > Yep. I've logged into my TD Ameritrade account several times to see if > they've limited purchases of GME. Supposedly Robinhood did limit purchases. > It looked like I could always buy on TDA... but I'm not sure. I would never > actually buy GME, *except* to screw The Man. 8^D > > On 1/29/21 3:41 PM, Merle Lefkoff wrote: > > Has anyone been watching what's happening in the stock market with GameStop? > > -- > ↙↙↙ uǝlƃ > > - .... . -..-. . -. -.. -..-. .. ... -..-. .... . .-. . > FRIAM Applied Complexity Group listserv > Zoom Fridays 9:30a-12p Mtn GMT-6 bit.ly/virtualfriam > un/subscribe <http://bit.ly/virtualfriamun/subscribe> > https://linkprotect.cudasvc.com/url?a=http%3a%2f%2fredfish.com%2fmailman%2flistinfo%2ffriam_redfish.com&c=E,1,vjPYuWV_SOqXmjm9v6nfchPYvTQOERJqzYuZ2EvGnKR7L9JjDHkhv09DfpBYVvGe1tHPFt0RRGwq0ChNxd4eziP-rcFnAxXsqnUAkkBW&typo=1 > FRIAM-COMIC > https://linkprotect.cudasvc.com/url?a=http%3a%2f%2ffriam-comic.blogspot.com%2f&c=E,1,Ng1EbcI2wHi1MUdaZwXmDZg2LgvtvJqHf7DOlh3YY2zT6TsytRdo9rGgU_AUtySrheyJhbod7GCSTftIa0Lyq26aHcwK5Q1ssH2dO5zJRMKCITI,&typo=1 > archives: http://friam.471366.n2.nabble.com/ > > - .... . -..-. . -. -.. -..-. .. ... -..-. .... . .-. . > FRIAM Applied Complexity Group listserv > Zoom Fridays 9:30a-12p Mtn GMT-6 bit.ly/virtualfriam > un/subscribe <http://bit.ly/virtualfriamun/subscribe> > http://redfish.com/mailman/listinfo/friam_redfish.com > FRIAM-COMIC http://friam-comic.blogspot.com/ > archives: http://friam.471366.n2.nabble.com/ > > - .... . -..-. . -. -.. -..-. .. ... -..-. .... . .-. . > FRIAM Applied Complexity Group listserv > Zoom Fridays 9:30a-12p Mtn GMT-6 bit.ly/virtualfriam > un/subscribe http://redfish.com/mailman/listinfo/friam_redfish.com > FRIAM-COMIC http://friam-comic.blogspot.com/ > archives: http://friam.471366.n2.nabble.com/ > -- Merle Lefkoff, Ph.D. Center for Emergent Diplomacy emergentdiplomacy.org Santa Fe, New Mexico, USA mobile: (303) 859-5609 skype: merle.lelfkoff2 twitter: @merle110
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