From: John Conover <john@email.johncon.com>
Subject: FUD in the economy?
Date: Wed, 7 Oct 1998 23:53:07 -0700
Greenspan is correct, as nearly as I can tell. Fear, Uncertainty, and
Doubt in the economy is NOT justified. Here is why. If we look at the
US equity market indices as an indicator, or benchmark, of the
economy, they have about a 1% daily root mean square of marginal
returns. At three months, (ie., mid July through mid October,) or
about 60 trading days, all possible index paths would have a root mean
square of sqrt (60) * 0.01 = 7.75%. (What this means is that for 68.2
= 1 sigma percent of the time, from any time, to three months later,
the index will be within +/-7.75% of its start value.) That means, we
are running at about a -2.35 sigma level from mid July, (9300 to 7500
on the DJIA.) We would expect that to happen about once every 1 /
0.0093868 days = 27.4 years, (which agrees with the historical metrics
reasonably precisely.)
And what's the chances of it continuing a year, or longer, to at least
mid 1999? The standard deviation would be 0.01 * sqrt (253), since
there are 253 days in a calendar year, which is 15.91%. So, three
sigma would be 47.7%, or from 9300 to 4862 on the DJIA. And what's the
chances of that happening? We would expect that to happen about once
every 1 / 0.00135 years = 741 years, or about three fourths of a
millenia!!! (The last time something like this happened was 1930-it
MAY have happened in the 1880s-we just don't have accurate metrics to
verify it-and it may have happened in Holland in the 1600s-ditto-and
it almost certainly happened in the 4'th century AD in the late Roman
empire.
Bear in mind that a very small probability of a 1930 happening next
year does not mean it won't-but the FUD is most certainly not
justified or rational. Caution is, however-we are 40.56% there.
John
--
John Conover, john@email.johncon.com, http://www.johncon.com/