Complex variable and Tobin asset theory

Why The Post-Lehman Reflation Is Reaching Its Limits

It’s ironic, or it seems that way to us, that two of the least understood financial markets by equity investors are two of the most systemically important – repos and gold. Even more ironic is how so many investors don’t even consider them to be all that important. In our view, stability in both markets is a pre-requisite for maintaining confidence in the financial system and keeping the credit/asset bubble inflated.

Gold and Repos is the extreme form of dividing the market into equities and bonds. Together the two category division is derived from the necessity of complex variables in a time smoothed investment practice. Tobin states, without explanation, that two characteristics make this division, we balance risk and yield. The explanation lies in a fundamental truth about smoothing over time, that norm requires complex variables to maintain the cycle.

Consider, in its fundamental form we are trying to make flow have two components, a regular order of goods arrivals with an associate phase shift in arrival times. They are the same variable. The problem is that the economy is not time smoothed, it is container smoothed. We care less about keeping arrival times synchronous and care more about filling up the shipping containers. It is the basic difference between container ergodic and time ergodic systems; DSGE vs Trade theory, the fundamental dichotomy of our economy, the dual normed system. The reason the yield curve is sloped upwards is because we are primarily container ergodic, and that means the long end of the curve is sparse and illiquid.  Banks have to model the yield curve as a bell curve with the long end of the bell hidden from view.  The implied losses on the long end of the curve do not become apparent until we crash. At the crash point, the curve becomes bell shaped as long term losses reveal themselves.

Dual normed behavior is fundamental to the economy.