Minyan Mailbag: The Problem With Quants

Mr. Practical,

All the quant models are failing.

• The ones designed to model and predict the performance of derivatives
• The ones doing the buying and selling in quant funds
• Those used by credit agencies to assign credit ratings.

That's worrying enough. Even more worrying is the fact that Helicopter Ben is a committed quant. He believes that the economy can be mathematically modelled. He believes he has the models to do it. Let's hope he is a lot more successful than his quant mates on Wall Street.

I love your work and would appreciate your comments.

Regards,
Minyan George


MG,

If only the quants had some common sense.

Jill caught a cold. Something was wrong. She was working too hard and cutting too many corners. She slowed down, took it easy, took care of herself, and got better.

Jack caught a cold. He didn't have time to stop. He was greedy. He took stimulants and kept going. He caught pneumonia and nearly died.

A recession is a healthy thing. It slows the economy and corrects the excesses, normally too much lending and too much resulting debt, creating a base from which new and healthy production can grow.

The Fed has put the economy on stimulants every time it wanted to slow down and correct the excess. Lenders always overshoot but the last thing they needed was a Fed saying they haven't. As a result debt of unparalleled proportions has now built up in the economy. On top of that over the last several quarters the Fed has encouraged more and the debt has grown at the fastest pace in 25 years (from the highest base).

It is just too simple for the quants to comprehend. I remember arguing with many that we have a "new economy" and debt doesn't matter, just debt service. That implies rates will stay low (negative) forever. That logic escapes me.

Pure and simple, the debt needs to be either paid back or destroyed. In order to be paid back the economy has to grow at rates that just are not realistic. That leaves destroyed. That means deflation (although we can't rule out a bout of hyper-inflation first).

-Mr. Practical