From: John Conover <john@email.johncon.com>

Subject: Re: News: Futurist: markets, attacks, point to possible depression

Date: 6 Nov 2001 02:30:19 -0000

Obviously, the not very significant odds of an imminent depression doesn't mean that a depression is not imminent-it might be, and might not be; such things are unknowable. But it does mean that there are probably more significant economic things to be concerned about. In reality, if things are managed correctly, it doesn't make that much difference, anyhow. For example, what is the chance of a significant depression, (i.e., one lasting at least 3 years, with a GDP decline that is at least a three standard deviation probability annual event,) happening in the course of an 80 year lifespan? Since there is a 77 year window around such an event that would effect the financial security of someone with an 80 year lifespan, the chances are (2 * 77) / 526, or about 29.3%-which is not insignificant odds. Its a handy number to know, since, under those circumstances, one should optimally maintain about 60% of one's net wealth in investments that were relatively immune to fluctuations in the GDP, (i.e., placing F = 2P - 1, or, 2 * .293 - 1 = 41.4%, at risk of a 50%-100% economic catastrophe.) I don't give financial advice, so exactly how to implement such a strategy will be left to your own ingenuity. John BTW, its actually not that easy, and a lot of creativity is usually in order. For example, many invest about half their net wealth in real property. However, during the US Great Depression of 1930-1933, asset values deteriorated an average of 60%-leaving many holding a big debt bag of insolvency, taking down the US banking system with them; more recently, there was a similar scenario during the Asian Contagion. Savings accounts, treasuries and Munis have a similar vulnerability in times of high inflation, too, (remember the early 1980's, or the S&L debacle-which financially ruined many.) Likewise, currencies, (for example, the yen-dollar ratio was about half what it is now in late 1994-which was disastrous depending on how and when one was moving money; many wealthy individuals in Latin/South America lost fortunes moving money from regional collapsing economies to the US currency haven.) Metals, stones, art, automobiles, etc., all have significant vulnerability over an 80 year lifespan. Such risk is what derivatives are all about, (and many run their own derivative strategy-usually exploiting the fact that standard deviations of values add root mean square in an investment portfolio, and risk can be reduced to any acceptable value by spreading asset allocations over many things, over the planet.) Remember that the objective is to make about 60% of the portfolio's value as stable, (i.e., minimal acceptable risk,) as possible, and enhance the portfolio's value by manipulating the remaining 40%-i.e., "hedge" the 40% against the 60%; always watching to move money in a defensive fashion. You will have to make your own decision on how to do that. John Conover writes: > > Always, in times of tribulation, doomsday prognostications capture > the media's attention. > > We might be headed into a depression, and we might not. Whether we > are, or not, is not knowable. > > However, the odds of a depression being imminent are not very > significant. > > The standard deviation of the increments in the US GDP, over the > 20'th century, was about 10% per year, (0.099733 from 1930-1995.) > > During the US Great Depression of 1930-1933, the GDP dropped about > 50%, (in 1930, it was $96.8 billion, in 1933, it bottomed at $56.8 > billion-the GDPs in the Asian Contagion in the late 1990's did about > the same.) > > The standard deviation of the decrease in the US GDP during a > depression that lasts at least three years is about sqrt (3) * 0.1 = > 0.17. > > Or, a 50% decrease would be about a 0.5 / 0.17 = 2.887 standard > deviation incident, which has a chance, on average, of once in 526 > years, or about twice a millennia-quite a rare event, indeed. > > John > > BTW, assumptions: Black-Scholes paradigm, erf (3) = 1, statistical > independence in the marginal increments of the US GDP-all reasonable > first order approximations, (depending on who is telling the story, > of course.) > > Statistical estimate on the standard deviation of marginal increments > of the US GDP being 10% is about 1 / sqrt (95 - 35), or about 12%, or > a confidence level of about 88%. Call it a 90% confidence level. > > Data references: 1996 US Federal budget, > gopher://sunny.stat-usa.gov:70/11/BudgetFY96, and the 1997 US Federal > budget, http://www.doc.gov/BudgetFY97/index.html. Data from Table 1.2, > "SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS(-) AS > PERCENTAGES OF GDP". Data not adjusted as constant 1987 dollars, nor > inflation. > > So there. > > http://www.computeruser.com/news/01/11/05/news15.html -- John Conover, john@email.johncon.com, http://www.johncon.com/

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