(Roughly) Daily

Posts Tagged ‘risk

“Location, location, location”*…

Adam Tooze on the biggest vulnerability in the global economy…

In this precarious moment – in the fourth quarter of 2022, two years into the recovery from COVID – of all the forces driving towards an abrupt and disruptive global slowdown, by far the largest is the threat of a global housing shock…

In the global economy there are three really large asset classes: the equities issued by corporations ($109 trillion); the debt securities issued by corporations and governments ($123 trillion); and real estate, which is dominated by residential real estate, valued worldwide at $258 trillion. Commercial real estate ($32.6 trillion) and agricultural land add another $68 trillion. If economic news were reported more sensibly, indices of global real estate would figure every day alongside the S&P500 and the Nasdaq. The surge in global house prices in 2019-2021 added tens of trillions to measured global wealth. If that unwinds it will deliver a huge recessionary shock.

In regional terms, as a first approximation, think of global real estate assets as split four ways, with the US, China and the EU each accounting for c. 20-22 percent and 35 percent or so belonging to the rest of the world.

The housing complex is at the heart of the capitalist economy. Construction is a major industry worldwide. It is one of the classic drivers of the business-cycle. But beyond the constructive industry itself, the influence of housing as an asset class is pervasive. Compared to equities or debt securities, residential real estate is owned in a relatively decentralized way. Homeownership defines the middle class. And for the majority of households in that class, those with any measurable net worth, the home is the main marketable asset.

Middle-class households are for the most part undiversified and unhedged speculators in one asset, their home. Furthermore, since homes are the only asset that most households can use as collateral, they pile on leverage. For households, as for firms, leverage promises outsized gains, but also brings with it serious risks in the event of a downturn. Mortgage and rental payments are generally the largest single item in household budgets. And household spending, which accounts for 60 percent of GDP in a typical OECD member, is also responsive to perceived household wealth and thus to home equity – the balance between home prices and the mortgages secured on it. For all of these reasons, a surge in mortgage rates and/or a slump in house prices is a very big deal for the world economy and for society more generally…

More background and an assessment of the outlook: “The global housing downturn,” from @adam_tooze.

For Tooze’s follow-up piece on the risk inherent in the $23 trillion US Treasury market, see here.

Harold Samuel

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As we mortgage our futures, we might recall that it was on this date in 1914 that the Federal Reserve Bank of the U.S. was opened. In actuality a network of 12 regional banks, joined in the Federal Reserve System, they oversee federally-chartered banks in their regions and are jointly responsible for implementing the monetary policy set forth by the Federal Open Market Committee.

In that latter role, they are central to the housing market in that they set interest rates and purchase mortgage securities from Fannie Mae and Freddie Mac (Government-Sponsored Enterprises in the mortgage market). At this point the Fed owns about a quarter of the mortgage-backed securities issued by Fannie Mae and Freddie Mac.

The Federal Reserve Banks in 1936 (source)

Written by (Roughly) Daily

November 16, 2022 at 1:00 am

“So these are the ropes, The tricks of the trade, The rules of the road”*…

Morgan Housel shares a few thing with which he’s come to terms…

Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking.

Most of what people call “conviction” is a willful disregard for new information that might make you change your mind. That’s when beliefs turn dangerous.

History is driven by surprising events but forecasting is driven by obvious ones.

People learn when they’re surprised. Not when they read the right answer, or are told they’re doing it wrong, but when they experience a gap between expectations and reality.

“Learn enough from history to respect one another’s delusions.” -Will Durant

Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works.

Unsustainable things can last longer than you anticipate.

It’s hard to tell the difference between boldness and recklessness, ambition and greed, contrarian and wrong.

There are two types of information: stuff you’ll still care about in the future, and stuff that matters less and less over time. Long-term vs. expiring knowledge. It’s critical to identify which is which when you come across something new.

Small risks are overblown because they’re easy to talk about, big risks are discounted and ignored because they seem preposterous before they arrive.

You can’t believe in risk without also believing in luck because they are fundamentally the same thing—an acknowledgment that things outside of your control can have a bigger impact on outcomes than anything you do on your own.

Once-in-a-century events happen all the time because lots of unrelated things can go wrong. If there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … pretty good. It’s why Arnold Toynbee says history is “just one damn thing after another.”

Many more affecting aphorisms at: “Little Rules About Big Things,” from @morganhousel @collabfund.

* “Rules Of The Road,” by Cy Coleman and Caroline Leigh (famously recorded by Tony Bennett and Nat King Cole)

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As we ponder precepts, we might send prophylactic birthday greetings to Samuel W. Alderson; he was born on this date in 1914.  A physicist and engineer of broad accomplishment, Alderson is probably best remembered as the inventor of the crash test dummy.  Alderson created his first dummies in 1956 to test jet ejection seats for the military.  But with the passage of the Highway Traffic and Motor Vehicle Safety Act in 1966 (on the heels of the stir created by Ralph Nader’s Unsafe at Any Speed), Alderson found a much broader market.  (From the first experiments on car safety in the 1930s, cadavers had been used to assess risk and damage; the dummy had obvious advantages.)  Alderson continuously improved his dummies, and later branched out to produce medical “phantoms” for simulations– e.g., synthetic wounds that ooze mock blood.

 source

Written by (Roughly) Daily

October 21, 2022 at 1:00 am

“Fortune sides with him who dares”*…

View of Genoa by Christoforo de Grassi (after a drawing of 1481)

Understanding the origin of the modern concept of risk…

Lately, we have all become risk assessment and risk management experts, thinking, talking and Tweeting about the chances we take when we engage in once-mundane activities. It’s hard to imagine doing without risk: the analytical instrument we use to calculate the advisability of undertakings that can result in gain or loss. Yet when the word risk entered the languages of western Europe during the 12th century (at roughly the same time as other words used to jigger the scales of Fortune: hazard and chance), it took some time to catch on. Niccolò Machiavelli (1469-1527) and Francesco Guicciardini (1483-1540) – the two great writers of the Italian 15th and 16th centuries who wrote about contingency and power while everything was collapsing around them – did not use the Italian rischio in the works for which they are best remembered, even though the Italians were early adopters of the word and the speculative behaviours it names.

The first known usage of the Latin word resicum – cognate and distant ancestor of the English risk – occurs in a notary contract recorded in Genoa on 26 April 1156. The captain of a ship contracts with an investor to travel to Valencia with the sum invested. The contract allocates the ‘resicum’ to the investor. In a typical arrangement, the captain received 25 per cent of the profit at the end of the journey. The investor or investors pocketed the resicum payout: the remaining 75 per cent. This contract also reminds us that the medieval Italian ship’s crew was an egalitarian society. It specifies that the voyage would be extended from Valencia to trade at Alexandria before returning to Genoa, but only if a majority of the men on board agreed.

Resicum worked a kind of practical magic in these early contracts. Canon law forbade the payment of interest on loans in medieval Europe (as Islamic law did in the eastern and southern Mediterranean). By inventing a bonus paid to the investor in the event of the successful completion of a journey, the resicum provided a workaround for venture capitalists and for the captain seeking capital. It also gave those who could not journey an opportunity to earn investment income. A small but significant proportion of the investors in these maritime contracts were retired seamen or women. Finally, it parcelled out the risk assumed by those who undertook the trans-Mediterranean journey…

The fascinating story in full: “How 12th-century Genoese merchants invented the idea of risk,” from Karla Mallette (@karlamallette) in @aeonmag.

See also: “Genoa: The Cog in the New Medieval Economy” source of the image above.

* Virgil (reminding us that a sense of contingent peril and prospect predated the Middle Ages)

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As we roll the dice, we might recall that risk came in a variety of forms in Medieval times: it was on this date in 1307 that Wilhelm Tell (or we tend to know him, William Tell) shot an apple off his son’s head.

Tell, originally from Bürglen, was a resident of the Canton of Uri (in what is now Switzerland), well known as an expert marksman with the crossbow. At the time, the Habsburg emperors of Austria were seeking to dominate Uri.  Hermann Gessler, the newly appointed Austrian Vogt (the Holy Roman Empire’s title for “overlord”) of Altdorf, raised a pole in the village’s central square, hung his hat on top of it, and demanded that all the local townsfolk bow before the hat.  When Tell passed by the hat without bowing, he was arrested; his punishment was being forced to shoot an apple off the head of his son, Walter– or else both would be executed. Tell was promised freedom if he succeeded.

As lore has it, Tell split the fruit with a single bolt from his crossbow.  When Gessler queried him about the purpose of a second bolt in his quiver, Tell answered that if he had killed his son, he would have turned the crossbow on Gessler himself.  Gessler became enraged at that comment, and had Tell bound and brought to his ship to be taken to his castle at Küssnacht.  But when a storm broke on Lake Lucerne, Tell managed to escape.  On land, he went to Küssnacht, and when Gessler arrived, Tell shot him with his crossbow.

Tell’s defiance of Gessler sparked a rebellion, in which Tell himself played a major part, leading to the formation of the Swiss Confederation.

Tell and his son (source)

“Fortune sides with him who dares”*…

Timing is everything: risk and the rhythm of the week…

The seven-day week originated in Mesopotamia among the Babylonians, and it has stuck around for millennia. However, it’s not inherently special. Egyptians once used a ten-day week, and Romans used an eight-day week before officially adopting a seven-day week in AD 321.

Still, the seven-day week is so ingrained that we may notice how days “feel.” I was recently caught off guard by a productive “Tuesday”, realizing halfway through the day that it was actually Monday. Recent research shows that a big player in the psychology of weeks is a tendency to take risks.

“Across a range of studies, we have found that response to risk changes systematically through the week. Specifically, willingness to take risks decreases from Monday to Thursday and rebounds on Friday. The surprising implication is that the outcome of a decision can depend on the day of the week on which it is taken.”…

Feels like a Tuesday: research explains why days ‘feel’ certain ways,” from Annie Rauwerda @BoingBoing. The underlying research, by Dr. Rob Jenkins, is here.

* Virgil

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As we take a chance, we might recall that it was on this date in 1908 (a Thursday) that Thomas Etholen Selfridge became the first American to die in an airplane crash. An Army lieutenant and pilot, he was a passenger on Orville Wright’s demonstration flight of the 1908 Wright Military Flyer for the US Army Signal Corps division at Ft. Meade, Maryland. With the two men aboard, e Flyer was carrying more weight than it had ever done before…

The Flyer circled Fort Myer 4½ times at a height of 150 feet. Halfway through the fifth circuit, at 5:14 in the afternoon, the right-hand propeller broke, losing thrust. This set up a vibration, causing the split propeller to hit a guy-wire bracing the rear vertical rudder. The wire tore out of its fastening and shattered the propeller; the rudder swivelled to the horizontal and sent the Flyer into a nose-dive. Wright shut off the engine and managed to glide to about 75 feet, but the craft hit the ground nose-first. Both men were thrown forward against the remaining wires and Selfridge struck one of the wooden uprights of the framework, fracturing the base of his skull. He underwent neurosurgery but died three hours later without regaining consciousness. Wright suffered severe injuries, including a broken left thigh, several broken ribs, and a damaged hip, and was hospitalized for seven weeks…

Wikipedia

Two photographs taken of the Flyer just prior to the flight, show that Selfridge was not wearing any headgear, while Wright was only wearing a cap. Given speculation that Selfridge would have survived had he worn headgear, early pilots in the US Army were instructed to wear large heavy headgear reminiscent of early football helmets.

source

Written by (Roughly) Daily

September 17, 2021 at 1:00 am

“Doubt thou the stars are fire”*…

 

solar-flare_resize_md

 

Solar storms are a relatively regular occurrence.  But in 1859, a massive solar storm occurred; solar flares created the one of the largest geomagnetic storms on record.  Telegraph service failed… but otherwise the event was largely a curiosity.

A new study calculates that our sun may produce another ‘superflare’ in the next 100 years… and suggests that the resulting damage to electronic systems on which we’ve come to depend could be devastating.

How much more disruptive would a superflare be? It’s hard to say because the damage would seem to be incalculable. A superflare even a hundred times more powerful than what we normally experience would almost certainly hit every unprotected electronic system on Earth in some fashion, disrupting or outright crippling powergrids around the world, disabling machinery and manufacturing, blowing out cell phones, satellites, and all the rest. Transportation systems depend on electronics, as do utility systems, communications systems, in short: everything could just stop working overnight, even though we probably wouldn’t feel a thing.

If the superflare was thousands of times more powerful than normal? For all we know, it could send humanity back to the Age of Sail practically overnight–at least until we can repair or replace the entire planet’s electronic infrastructure, a tall order when you have no power transmission to manufacture replacement electronic components and we’re all reduced to communicating using carrier pigeons and old fashioned letters…

The solar storm of 2012 was of similar magnitude to the 1859 flare, but it passed Earth’s orbit without striking the planet, missing by nine days.  For more on what we might expect of we’re not so lucky next time, see “Massive Superflare Eruption from Sun within 100 Years Possible, New Study Says.”

And for more background see: “Solar Flare: What If Biggest Known Sun Storm Hit Today?

* Shakespeare

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As we slip on our shades, we might spare a thought for Giovanni Battista Riccioli; he died on this date in 1671.  He is known, among other things, for his experiments with pendulums and with falling bodies, for his discussion of 126 arguments concerning the motion of the Earth, and for discovering the first double star.  But he is perhaps most remembered for introducing (in in Almagestum Novum in1651) the current scheme of lunar nomenclature: he named the more prominent features after famous astronomers, scientists and philosophers, while the large dark and smooth areas he called “seas” or “maria”.  The lunar seas were named after moods (Seas of Tranquillity, Serenity) or terrestrial phenomena (Sea of Rains, Ocean or Storms).

440px-Giovanni_Battista_Riccioli source

 

Written by (Roughly) Daily

June 25, 2019 at 1:01 am

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