Confidence: What Google has to tell us

Throughout my reading of the financial news of the last two years, I have come across two main themes again and again:
-The subprime crisis and its aftermath
-The rising of Google, possibly the most scrutinized company of our time

A lot of people agree that the subprime mess stems from the irrational exuberance of markets, which has successively led the markets up, down, and up again.
The recovery from the March lows may only be due to confidence gaining ground.

I believe one reason we have trouble understanding and taming these "animal spirits" is reductionism. Can we consider the confidence surveys we follow with great attention to be relevant when they only consider a sample of the population and are limited to a single country? In our complex and interlinked economy, can we consider confidence to have territorial frontiers?

This is where Google and its worldwide presence comes into play. The ubiquity of the "Don't be evil" company could turn out to provide us with a great tool to assess Global Confidence, a worldwide prediction market without the biases and reductionism of traditional (and costly) surveys.

A lot of talks has taken place lastly on the different scenarios we
should expect.
Google can help us compare, through the search occurrences and
apparitions in Google News of the different terms, were we stand.




Not surprisingly, we observe a good fit between search occurrences and apparition in the news.
Now, assuming that the search volume index represents the global opinion and News reference volume the experts opinion, the global and experts thinking seem correlated.

Therefore, the recent increase in news articles mentioning a double dip recession could reach a Tipping Point, moment when the fear of a
 W shaped recovery could feed in the global opinion and entail a self fulfilling prophecy.

If, we are truly living a Confidence based recovery, the only thing we have to hope for is hope itself.

Confidence is also greatly influenced by people that, following Malcom Gladwell's definition, we should define as Mavens.
Example Investors Figures of these Mavens would include Warren Buffet, Bill Gross, Marc Faber and R.Prechter. These "information specialist are the people that "we rely upon to connect us with new information" and have the capacity to "start word to mouth epidemics".
Once again, the growing pessimism of these Mavens (Bill Gross' last newsletter expresses fear of Bubbles, for those who missed it) could feed into our global confidence Google Index.

The Google Search Volume for "Market Bubble" is currently reaching yearly highs.




No Indicator can predict how the markets will react.
Ironically, Google has been one of the pioneers in implementing a prediction markets for employees to assess variables as the company's future growth, on the assumptions that the higher the employees' confidence, the more they would strive to drive the future growth.

Google, with its worldwide presence and use, could turn out to be a great tool for trend analysis.
Maybe Google is the End of the World as we know it, but the picture it has to show us could be the World as we should know it.

La reprise est-elle au coin de la Rue?

Selon Ben BERNANKE, elle semble l'être.

Pourtant, peu de signes pointent aujourd'hui vers une sortie de crise rapide. Pour une analyse point par point du gap entre le scénario optimiste de la FED et la réalité des indicateurs, voir ici.

Peu de personnes remettent en cause le fait que depuis la mi-mars, l'économie mondiale semble avoir retrouve le chemin de la croissance économique. Cependant, encore moins paraissent l'attribuer a une amélioration des fondamentaux.

Se pencher sur le phénomène d'illusion monétaire offre une piste de compréhension du rally actuel.

Si il y a une leçon à retenir de la crise des subprimes, c'est que l'ensemble des scénarii possibles est beaucoup plus important que ce que les modèles, voire les individus, peuvent l'imaginer.

Les systèmes complexes, dont les marchés financiers font partie intégrante, sont caractérisés par des Marches Aléatoires. Le Mouvement Brownien utilisé pour représenter l'évolution des Marchés Financiers, comme son nom ne l'indique pas, est dérivé du mouvement pris par des particules de Pollen dans un liquide.

Ce phénomène de marche aléatoire rend obligatoire une analyse en termes de Scénarii. Nous devons apprendre à vivre avec, et exploiter, l'improbable.

“Better prepare for confrontation than hope that the enemy will not come;
Better ensure one’s defense is impenetrable than hope that the enemy will not attack.” – Sun-Tzu The Art of War 6th Century, B.C.

Développer plusieurs scénarii permet de développer des stratégies de couverture variées et de fait de bénéficier d'une couverture globale face aux chocs asymétriques.

Comme le prouve la publication le 20 Novembre par la Société Generale du Worst Case Scenario, cette méthodologie a gagne en reconnaissance au sein des établissements financiers.

Société Générale Worst Case Debt Scenario Fourth Quarter Nov 2009



Parmi les indicateurs pouvant nous renseigner sur les inquiétudes et tendances, Google se révèle être un outil puissant. Pouvoir analyser ce que les individus recherchent et publient, nous donne l'opportunité de dessiner une opinion collective et de pondérer la place accordée aux différentes formes de Reprise.

L'indicateur de confiance que constitue les recherches effectuées par les individus au niveau mondial semble pessimiste sur la pérénité de la reprise économique.
Alors que le scénario d'une reprise en "W" était le moins évoqué par la presse en Juin, il fait aujourd'hui partie du consensus.

L'opinion collective: Part des recherches effectuees sur GOOGLE (a date du 22 Novembre 2009) concernant les différents scénarii de reprise:

Si la reprise économique est, comme R.SHILLER le pense, une prophétie auto-réalisatrice alimentée par la confiance collective, l'augmentation depuis Juillet des recherches relatives a une (non) reprise en "L" peut être un indicateur a surveiller.

La théorie veut que les Marches Financiers ne soient que le reflet de l'économie réelle. Pourtant, que les interactions entre les deux sphères ne soient pas a sens unique, et que les Marches peuvent également influencer l'économie réelle.

Depuis des années, l'évolution de l'économie a été fortement influencée par l'appréciation des actifs par l'effet de richesse dont beneficiait les consommateurs.

De fait, vouloir redémarrer l'économie réelle par le levier des marches financiers (hautement plus réactifs que leur contrepartie réelle) fait sens.

La politique d'inflation des actifs que mène la FED se justifie:

• Au niveau des individus, l'effet de richesse dont ils bénéficient se traduisant par un regain de confiance et une incitation a consommer
• Au niveau des entreprises, en desserrant la contrainte de crédit a laquelle elles font face: a nombre d'actions flottantes stable, l'appréciation des actions engendre une hausse des capitaux propres des entreprises et restaure leur ratio Capitaux Propres/Dette.

Cependant, qui dit plus réactif dit aussi plus volatil.

 Plus les Marches s'apprécient, plus l'effet potentiel sur l'économie réelle est fort (les individus voyant leur Valeur Nette augmenter avec celle de leurs actifs). D'un autre cote, une valorisation trop forte et rapide des marches éveillent des doutes chez les investisseurs quant aux 'fondamentaux'.

Tendances de Recherche pour les termes 'Market Bubble' en 2009:

Que ce soit en profitant de l'illusion monétaire (provoque par l'augmentation de la masse monétaire, et la dévalorisation du dollar engendrée)  dont sont victimes les investisseurs, ou en communiquant sur les indicateurs chers aux marches financiers BERNANKE tente de déclencher un cercle vertueux  (positive feedblack loop) pouvant permettre un redémarrage rapide de l'économie américaine.

Le fait de maintenir des taux très bas rend le cout de détenir de l'argent en liquide fort (votre argent est moins rémunéré). De fait, les investisseurs sont directement incités à placer leur argent dans des véhicules plus risqués mais offrant un rendement bien supérieur: obligation, actions...

La Banque Centrale ne focalisant son objectif d'inflation que sur l'économie réelle, l'inflation des actifs financiers qu'elle génère par sa politique de taux bas ne fait pas partie de ses préoccupations, comme le montre l'absence de référence aux Marches Financiers au sein des indicateurs qu'elle surveille:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions,including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

La reprise dont nous sommes témoins depuis la mi-mars est essentiellement tributaire du regain de confiance des agents. Cette situation peut se perpétuer jusqu'à ce qu'un cercle vertueux entre Marches Financiers et economie reelle se mette en place. Néanmoins, l'ampleur et la rapidité de la reprise ont fait naitre des doutes sur la corrélation entre évolution des Marches Financiers et économie réelle. Si ces doutes se matérialisent par un retrait des investisseurs des Marches, un nouveau plongeon n'est pas a exclure.

Une Reprise au coin de la Rue? Peut être, mais quelle rue?

Brainstorming on How Complex system Fail

Richard I COOK comes up with a must read piece on how complex system fail.
Here are his 18 bullet points, and my thoughts on the subject:

1.Complex systems are intrinsically hazardous systems.


All of the interesting systems (e.g. transportation, healthcare, power generation) are inherently and unavoidably hazardous by the own nature. The frequency of hazard exposure can sometimes be changed but the processes involved in the system are themselves intrinsically and irreducibly hazardous. It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems.

what comes to my mind: Stock Market, Regulation, Behavioural Finance, Bonded Rationality

2.Complex systems are heavily and successfully defended against failure

The high consequences of failure lead over time to the construction of multiple layers of defense against failure. These defenses include obvious technical components (e.g. backup systems, ‘safety’ features of equipment) and human components (e.g. training, knowledge) but also a variety of organizational, institutional, and regulatory defenses (e.g. policies and procedures, certification, work rules, team training). The effect of these measures is to provide a series of shields that normally divert operations away from accidents.

what comes to my mind: Risk Analysis, FED, Reserves, Regulation, Technical Analysis, Creative Destruction


3. Catastrophe requires multiple failures – single point failures are not enough.

The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents. Most initial failure trajectories are blocked by designed system safety components. Trajectories that reach the operational level are mostly blocked, usually by practitioners.

what comes to my mind: Complexity of Finance, Hindsight Bias, Systemic Failures, Feedback loops, Power Laws, Black Swans

4. Complex systems contain changing mixtures of failures latent within them


The complexity of these systems makes it impossible for them to run without multiple flaws being present. Because these are individually insufficient to cause failure they are regarded as minor factors during operations. Eradication of all latent failures is limited primarily by economic cost but also because it is difficult before the fact to see how such failures might contribute to an accident. The failures change constantly because of changing technology, work organization, and efforts to eradicate failures.

What comes to my mind: Optimization, Efficient Market Hypothesis, FAMA


5. Complex systems run in degraded mode


A corollary to the preceding point is that complex systems run as broken systems. The system continues to function because it contains so many redundancies and because people can make it function, despite the presence of many flaws. After accident reviews nearly always note that the system has a history of prior ‘proto-accidents’ that nearly generated catastrophe. Arguments that these degraded conditions should have been recognized before the overt accident are usually predicated on naïve notions of system performance. System operations are dynamic, with components (organizational, human, technical) failing and being replaced continuously.

What Comes to my mind: 



6. Catastrophe is always just around the corner.


Complex systems possess potential for catastrophic failure. Human practitioners are nearly always in close physical and temporal proximity to these potential failures – disaster can occur at any time and in nearly any place. The potential for catastrophic outcome is a hallmark of complex systems. It is impossible to eliminate the potential for such catastrophic failure; the potential for such failure is always present by the system’s own nature.


What Comes to my mind: Illusion of Control, Great Moderation illusion, Uncertainty principle, Prudential regulation


7. Post-accident attribution accident to a ‘root cause’ is fundamentally wrong.


Because overt failure requires multiple faults, there is no isolated ‘cause’ of an accident. There are multiple contributors to accidents. Each of these is necessary insufficient in itself to create an accident. Only jointly are these causes sufficient to create an accident. Indeed, it is the linking of these causes together that creates the circumstances required for the accident. Thus, no isolation of the ‘root cause’ of an accident is possible. The evaluations based on such reasoning as ‘root cause’ do not reflect a technical understanding of the nature of  failure but rather the social, cultural need to blame specific, localized forces or events for outcomes.


What Comes to my mind: Hindsight bias, Reductionism, KAHNEMAN, Subprime Crisis, Management Books


8. Hindsight biases post-accident assessments of human performance.


Knowledge of the outcome makes it seem that events leading to the outcome should have appeared more salient to practitioners at the time than was actually the case. This means that ex post facto accident analysis of human performance is inaccurate. The outcome knowledge poisons the ability of after-accident observers to recreate the view of practitioners before the accident of those same factors. It seems that practitioners “should have known” that the factors would “inevitably” lead to an accident.2 Hindsight bias remains the primary obstacle to accident investigation, especially when expert human performance is involved.


What comes to my mind: Forward Thinking, Opportunism, Survivorship Bias


9. Human operators have dual roles: as producers & as defenders against failure


The system practitioners operate the system in order to produce its desired product and also work to forestall accidents. This dynamic quality of system operation, the balancing of demands for production against the possibility of incipient failure is unavoidable. Outsiders rarely acknowledge the duality of this role. In non accident filled times, the production role is emphasized. After accidents, the defense against failure role is emphasized. At either time, the outsider’s view misapprehends the operator’s constant, simultaneous engagement with both roles.


What Comes to my mind: Complexity (and acknowledged lack of understanding) of Financial Instruments, VaR, Black Swans


10. All practitioner actions are gambles


After accidents, the overt failure often appears to have been inevitable and the practitioner’s actions as blunders or deliberate willful disregard of certain impending failure. But all practitioner actions are actually gambles, that is, acts that take place in the face of uncertain outcomes. The degree of uncertainty may change from moment to moment. That practitioner actions are gambles appears clear after accidents; in general,post hoc analysis regards these gambles as poor ones. But the converse: that successful outcomes are also the result of gambles; is not widely appreciated.


What comes to my mind: Reductionism of the complexity of Finance, Illusory importance given to Track Records, Survivorship Bias, Finance is considered too Serious.


11) Actions at the sharp end resolve all ambiguity


Organizations are ambiguous, often intentionally, about the relationship between production targets, efficient use of resources, economy and costs of operations, and acceptable risks of low and high consequence accidents. All ambiguity is resolved by actions of practitioners at the sharp end of the system. After an accident, practitioner actions may be regarded as ‘errors’ or ‘violations’ but these evaluations are heavily biased by hindsight and ignore the other driving forces, especially production pressure.


What Comes to my mind:


12. Human practitioners are the adaptable element of complex systems


Practitioners and first line management actively adapt the system to maximize production and minimize accidents. These adaptations often occur on a moment by moment basis. Some of these adaptations include: (1) Restructuring the system in order to reduce exposure of vulnerable parts to failure. (2) Concentrating critical resources in areas of expected high demand. (3) Providing pathways for retreat or recovery from
 expected and unexpected faults. (4) Establishing means for early detection of changed system performance in order to allow graceful cutbacks in production or other means of increasing resiliency.


What Comes to my mind: Risk Analysis, Management Reductionism, Holistic view of Business, Flaw of Averages




13. Human expertise in complex systems is constantly changing


Complex systems require substantial human expertise in their operation and management. This expertise changes in character as technology changes but it also changes because of the need to replace experts who leave. In every case, training and refinement of skill and expertise is one part of the function of the system itself. At any moment, therefore, a given complex system will contain practitioners and trainees with varying degrees of expertise. Critical issues related to expertise arise from (1) the need to use scarce expertise as a resource for the most difficult or demanding production needs and (2) the need to develop expertise for future use.


What Comes to my mind:

 Too much time is spent trying to find out more and more about less and less, until we know everything about nothing,'' MONTIER says. ``Rarely, if ever, do we stop and ask what do we actually need to know

14. Change introduces new forms of failure.


The low rate of overt accidents in reliable systems may encourage changes, especially the use of new technology, to decrease the number of low consequence but high frequency failures. These changes maybe actually create opportunities for new, low frequency but high consequence failures. When new technologies are used to eliminate well understood system failures or to gain high precision performance they often introduce new pathways to large scale, catastrophic failures. Not uncommonly, these new, rare catastrophes have even greater impact than those eliminated by the new technology. These new forms of failure are difficult to see before the fact; attention is paid mostly to the putative beneficial characteristics of the changes. Because these new, high consequence accidents occur at a low rate, multiple system changes may occur before an accident, making it hard to see the contribution of technology to the failure.


What Comes to my mind: Backlash of the Rationalization Era, Pattern recognition illusion, VaR, Risk Hedging, Illusion of Forecasting Black Swans




15. Views of ‘cause’ limit the effectiveness of defenses against future events


Post-accident remedies for “human error” are usually predicated on obstructing activities that can “cause” accidents. These end-of-the-chain measures do little to reduce the likelihood of further accidents. In fact that likelihood of an identical accident is already extraordinarily low because the pattern of latent failures changes constantly. Instead of increasing safety, post-accident remedies usually increase the coupling and complexity ofthe system. This increases the potential number of latent failures and also makes the detection and blocking of accident trajectories more difficult.


What comes to my mind: Inference is illusory, the increase in car accidents related deaths after 9/11, Don't give credit to people who were right about past events

Do not repeat the tactics which have gained you one victory, but let your methods be regulated by the infinite variety of circumstances. SUN TZU

16. Safety is a characteristic of systems and not of their components


Safety is an emergent property of systems; it does not reside in a person, device or department of an organization or system. Safety cannot be purchased or manufactured; it is not a feature that is separate from the other components of the system. This means that safety cannot be manipulated like a feedstock or raw material. The state of safety in any system is always dynamic; continuous systemic change insures that hazard and its management are constantly changing.


What comes to my mind: Current atomicity of Financial regulation, FED, ECB, cooperation and NASH's Equilibrium

For should the enemy strengthen his van, he will weaken his rear; should he strengthen his rear, he will weaken his van; should he strengthen his left, he will weaken his right; should he strengthen his right, he will weaken his left. If he sends reinforcements everywhere, he will everywhere be weak SUN TZU (again)

17. People continuously create safety


Failure free operations are the result of activities of people who work to keep the system within the boundaries of tolerable performance. These activities are, for the most part, part of normal operations and superficially straightforward. But because system operations are never trouble free, human practitioner adaptations to changing conditions actually create safety from moment to moment. These adaptations often amount to just the selection of a well-rehearsed routine from a store of available responses; sometimes, however, the adaptations are novel combinations or de novo creations of new approaches.


What Comes to my mind: Moderation principle, Staying away of what you don't understand, Marathon runners and Sprinters / BUFFET and Day Traders


18. Failure free operations require experience with failure


Recognizing hazard and successfully manipulating system operations to remain inside the tolerable performance boundaries requires intimate contact with failure. More robust system performance is likely to arise in systems where operators can discern the “edge of the envelope”. This is where system performance begins to deteriorate, becomes difficult to predict, or cannot be readily recovered. In intrinsically hazardous systems, operators are expected to encounter and appreciate hazards in ways that lead to overall performance that is desirable. Improved safety depends on providing operators with calibrated views of the hazards. It also depends on providing calibration about how their actions move system performance towards or away from the edge of the envelope.


What comes to my mind: !Not finding books on Amazon telling the story of Failure.

Illusion Monétaire, Marchés Financiers et Bulles

Peu de personnes savent ce qu'est et ce qu'implique l'illusion monétaire.
Il y a de plus de fortes chances pour que la minorité qui connaissant le phénomène (dont vous et moi, tout du moins après lecture de cet article) n'en comprenne pas toutes ses implications.

Le biais d'illusion monétaire jouit d'une reconnaissance si faible qu'il n'apparait selon la base Factiva de Reuters que dans environ 700 articles sur les dix dernières années, contre environ 4 millions d'occurrences pour le terme "inflation". Pourtant, inflation et illusion monétaire sont intrinsèquement liés.
Encore plus significatif, observons les moments ou des articles de presse contenant "Money Illusion" sont publiés:

Pour résumer, l'illusion monétaire est un phénomène dont la couverture médiatique est fonction croissante de la conjoncture. En temps de crise, le nombre de références augmente.

L'opinion collectif  étant un driver majeur des marchés financiers et de l'économie (comme évoqué dans l'article In-croyable Banquier Central), et cette opinion étant elle-même largement influencée par les médias d'information, il me semble important de se pencher sur le phénomène d'illusion monétaire.


Pour bien comprendre ce qu'est l'illusion monétaire, considérons cet exemple:
On vous offre une prime destinée à l'achat d'une voiture. Comme souvent en économie, on vous donne un choix:

• Disposer d'une somme de 20 000€ pour l'achat immédiat

• Attendre 5 ans et disposer de 40 000€

Jusque là, tout va bien.
En revanche, admettons que au fil de ces 5 années d'attente la monnaie se soit dépréciée fortement et ne vale plus que 50% de sa valeur actuelle.
Dans ce cas, les 40 000€ perçus dans 5 ans "vaudront" 20 000€ à la valeur actuelle de la monnaie.
Vous aurez donc doublé la somme perçue, mais serez vous plus riches? Non.
Mieux: possédant alors une voiture à 40 000€ et non pas une voiture à 20 000€, votre valeur nette aura t'elle augmentée? Non.
Mais, 40 000€ c'est plus que 20 000€, non? Et bien dans ce cas oui, si vous êtes victime d'illusion monétaire.

Être victime d'Illusion monétaire, c'est fonder ses décisions économiques sur des Valeurs Nominales et non Réelles.
(Valeur Nominale = Valeur réelle + Variation des Prix)

L'illusion monétaire est tout d'abord un phénomène psychologique nous influençant au quotidien dans tous types de choix: investissements, pricing, prêts, ventes... comme l'ont montré TVERSKY et DIAMOND.

L'exemple pré-cité peut paraitre simpliste. Pourtant, les effets de l'illusion monétaire sont omniprésents et influent fortement sur le comportement des investisseurs.

• Idée reçue numéro 1: L'inflation est un phénomène maitrisé 

Je crois aux idées de l'Économie du Comportement (Behavioral Economics) concernant  les biais psychologiques dans les choix des individus et l'importance de l'information. Les implications de  l'inflation sont sous estimées et mal connues. En 2007, l'ESCP offrait aux étudiants (dont moi à l'époque) le droit de disserter sur le sujet "L'inflation est-elle partout et toujours un frein à la croissance économique".  On estime qu'il faut 2 ans de classe préparatoire pour commencer à cerner le sujet!

En réalité, l'inflation réelle est supérieure à l'inflation rapportée le Consumer Price Index (US)  car la composition de l'indicateur minore par définition l'augmentation des prix (le CPI exclu par exemple Food et Energy, et ne prend pas en compte l'inflation des actifs financiers).

 

En fondant notre analyse des effets de l'inflation, et de son corolaire d'illusion monétaire, sur la progression des revenus médians des foyers aux États-Unis, les résultats portent à réflexion:

En calculant à partir des chiffres rapporté par le CPI officiel, non seulement le Revenu médian par foyer a chuté en termes nominaux de plus de 4% entre 2000 et 2008, il aurait du gagner 25% pour conserver un pouvoir d'achat équivalent.

• Idée reçue numéro 2: Les monnaies des pays développés ne peuvent pas varier assez fortement pour se soucier du phénomène d'illusion monétaire.

Les monnaies sont elles aussi soumises au bon vouloir des marchés financiers. Si sur le long-terme la valeur d'une monnaie reflète des fondamentaux de l'économie du pays, à court-terme elle est influencée par les croyances des marchés et soumise à leur exubérance.

Prenons pour exemple le Dollar. Celui-ci semble tiré structurellement vers le bas en raison, entre autres, des mauvaises habitudes américaines en termes de Dette ou de création monétaire. Pourtant, son rôle clé dans Bretton Woods 2 fait du Dollar une valeur refuge pour les investisseurs dans certaines circonstances. Au final, le billet vert fluctue fortement car il est soumis à l'irrationalité des marchés.

  

PIB, Résultats Nets des Entreprises, Valeurs Immobilières, Stock Markets sont des exemples d'indicateurs économiques souvent (trop?) analysés sans prendre en compte le phénomène d'illusion monétaire.

Voici quelques illustrations pouvant porter à réflexion:

L'analyse économique étant largement fondée sur la relativité entre 2 indicateurs ou plus (dénomination du pétrole en dollar, Gains sur le CAC en Euros...), analyser en isolant les effets de l'illusion monétaire est essentiel pour comprendre les tendances.