6. The Latest “Normal”

Today, we are in the midst of an undesirable mix of tight economic and financial conditions. Opaque derivative products which include among others Collateralized-Debt-Obligations and Exchange-Traded Funds continue to shape the markets. Economists need to rethink certain economic concepts and relationships. Actually, fiscal stimulus spending is not stimulating anything. The deadly embrace between over-indebted sovereigns and over-leveraged banks has created a vicious cycle. Faced with these new economic and financial market imbalances, portfolio management has become much more difficult. We need to arm ourselves with how to manage tail risks against the inevitable and recurring loss of confidence which comes from market instability. We must adapt continuously along with the market whatever the pressure. Acknowledging errors and adjusting to them is crucial. Understanding market events and their effects on the market system is an essential element toward building a financial warning system. To this end, we need to identify all pre-switching points; implement them in algorithms that can trigger a warning signal. If we think of Keynes levels, the sixth level would be to have a drummer like mind … to be ahead of the beat. In the end what we achieve by understanding markets’ fractality is more than a tool; it is a way of thinking.