"However, buying stocks [on the rally on August 29, 2007] because they're "bargains", with the Dow a mere 6% down from the nominal all-time high, with the economy's warning lights all in the red and flashing, and with the "recession klaxon" sounding, is either speculation of the most egregious kind or simply moronic."A second example is his comment from "Mountains, Molehills and the Government":
"Rather, the problem is just getting started, and the worst is yet to come."My response was that the only significant problem facing the economy and/or financial markets was the potentially precipating panic due to the rising subprime mortgage rate of defaults and that the potential for panic seemed to be dissipating. Oroborous replied as follows:
"Would you like to make a small wager on that ?"I wondered what exactly we might bet on and Oroborous replied:
"You'd have to come up with a description of what you'd be willing to wager won't happen.Whatever I like? Excellent! I bet the stock market doesn't go down 100% in the next month!
"We could use GDP stats, employment figures, foreclosure stats, declines in home prices...
"Whatever you like."
Actually, being the fair guy that I am, let me propose something more sporting. What I think the fundamental claim that Oroborous is making is that something unusually bad is in store for the markets and the economy. For example, people who are investing right now (or at least on August 29th) are moronic for not seeing a train wreck coming.
I'm claiming that nothing out of the ordinary is likely to occur and that there's no readily available knowledge that makes the current moment a particularly bad (or good) time to invest.
So what's ordinary? One thing that ordinarily occurs is that the Dow Jones Industrial Average chops around an upward trendline of about 6% per year. The standard deviation of the movement about that trendline for any given period can be approximately predicted from lognormal standard deviations of the daily returns. If the lognormal standard deviation of the daily returns is S, the lognormal standard deviation for a period of N trading days is S * (N 0.5). The lognormal standard deviation of the daily returns for the DJIA from August 1st to September 14th is 1.27%. The quarterly, 1/2 yearly, and yearly derived standard deviations to the downside would be approximately 10%, 13%, and 19% respectively.
To have statistical confidence (to the 95% confidence level) that something out of the ordinary has occurred, we would need to see a drop of at least 1.96 standard deviations below the expected trend line. Since my prediction is simply that we don't observe anything out of the ordinary (with statistical confidence), I thus predict (and am willing to bet) that the DJIA doesn't drop more than 17% in the next 90 days, 22% in the next 180 days, or 29% in the next year. (Note that all these calculations are done in the lognormal domain which is why the don't "add" up).
Since the DJIA is more or less as good a measure as any regarding the future health of all aspects of the economy, if Oroborous isn't willing to take one of the above bets, then we have to assume that he and I are in concurrence that nothing unusual and measurable with statistical confidence is likely to occur to the downside during the above periods due to the subprime markets, the housing market, or anything else.