Monday, October 13, 2008

Black Swans Kill

Stress in Global Markets Is a `Black Swan Event'.

Oct. 13 (Bloomberg) -- Measures of stress in worldwide markets are so far from historical norms that they qualify as a ``black swan event.''

The CHART OF THE DAY shows Bloomberg's Financial Conditions Index, which includes yield spreads and measures of the money, stock and bond markets. The index's drop this month is the kind of rare, devastating event described in Nassim Taleb's book ``The Black Swan: The Impact of the Highly Improbable,'' said Nigel Marriott, the founder of Bath, England-based Marriott Statistical Consulting Ltd.

``It's way off the scale, a one-in-billions chance,'' said Marriott, a fellow of the Royal Statistical Society. ``This is absolutely a black swan event.''

In statistical theory, about 68 percent of events are within one standard deviation above or below the average, 95 percent are within two deviations and 99.7 percent within three. Markets are currently 9.47 so-called standard deviations from usual levels, the Bloomberg index shows.

The measures indicate conditions so unusual that they're comparable only with winning the lottery twice in a week or the earth being destroyed by an asteroid, said David Watts, a strategist at CreditSights Inc. in London.

The data go back only to 1992 and so don't reflect market disruptions such as Black Monday in October 1987 or the Great Depression.

``The Depression was an event in human history,'' said Marriott. ``So is this.''

1 comment:

Quantum_Flux said...

I can't see it being so bad, with the modern invent of the internet information travels fast, when people start losing jobs they'll divert their attention to enginuity and solve the problems....I'm fairly optimistic of this at least. Can you imagine the Great Depression of the 1930s and 1940s being as bad if everybody owned a house and had internet/cell phone access?