Random Thoughts

Dinosaurs, Markets and Pipers

Dinosaurs evolved a humongous increase in body size and predatory strength and dominated the earth for nearly one hundred million years. This required large consumption of plant and or animal food for energy resources with the specter of starvation in times of scarcity. There was another chink in their armor. Like the reptiles of today, they laid eggs and the sex of the progeny was dependent on the ambient temperature. Present day turtle and crocodile eggs hatch as all females or all males strictly by ambient temperature variation. A prolonged and persistent temperature change like the one caused by a meteorite striking the Yucatan peninsula of Mexico could have caused unisex hatching and extinction. This paved the way for the age of mammals sixty-five million years ago. 

Unexpected catastrophes in nature and markets ruin the plans of mice and men. Even a beneficial mutation may be weeded out before it can achieve fixation in the population if that particular animal suffers an early demise by accident or predation, before it has had a chance to pass the beneficial and advantageous trait to its progeny. In real life Bell shaped Gaussian curves often have unpredictable fat tails. Nissim Taleb and Mandelbrot emphasize this in their recent books. The LTCM debacle, Russian and Argentinian defaults, Asian and Mexican currency crisis and the current sub-prime mortgage meltdown are all proofs of fat tails, black swans and unpredictable uncertainty.

Markets defy gravity only for limited periods. Ultimately the pied piper of Hamlin has to be paid to retrirve the na've children enticed by enchanting music. Defiance of gravity is halted and the euphoria goes into an accelerating fall to ultimately shatter as the follies of Greenspan prove. Now Helicopter Ben Bernanke is slashing interest rates desperately and dropping free cash from the sky to blow another bubble which will burst with a bigger bang. In medical terms we call this tachyphylaxis or addictive tolerance. Human opioid receptors need larger and larger doses of heroin and yet achieve lesser and lesser highs. Eventually they die of an overdose or go into a terror and painful withdrawal. The US is heading back again to a post-Vietnam stagflation with decreases good job creation and widening economic disparity.

India with its rising current account and budget deficits is in the grip of a bull market mania dictated by the FIIs (wanting an appreciating rupee and high interest rates to play the carry trade game) and a compliant RBI. China by thwarting currency appreciation, trade and current account surpluses and by exploiting its citizens for slave labor and hastening their demise by rampant pollution is headed to a wreck by another road. The EU with a runaway rising currency, over generous pension benefits etc. is headed to hell by the deflationary road like Japan of the nineties.

It looks like all roads lead to hell when there are irresponsible central banks following inane policies to benefit the powerful financial institutions at the cost of the taxpaying public and elected or unelected political leaders whose lust for power dwarfs their honesty, decency and intellect.


More by :  Gaurang Bhatt, MD

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