This is a synopsis of a series of reports that my firm (UBS) recent published on the history, causes, and implications of economic bubbles (did you think this post was about Pallys??). I thought it an interesting summary, so I post here:

Why Bubbles Can't Be Avoided

Economic history shows that in an increasingly stable and reliable environment, individual market participants will take on more risk. This behavior creates favorable conditions for bubbles. A series of research reports from Wealth Management Research (WMR) takes a closer look at this phenomenon.

Economic history is handsomely populated with bubbles over the past 400 years [1]. The most recent ones were related to the US housing market and technology, but Holland's tulip mania in the 1600s is often cited as a forbearer of modern asset bubbles. Feverish demand sent prices for tulip bulbs soaring to levels several times the average yearly income of a skilled craftsman until demand finally collapsed in 1637.

Two UBS economists, Yves Longchamp and Veronica Weisser, both of WMR, examine the bubble phenomenon in a series of reports, called "Bubble-ology." One of the main conclusions of their study is that bubbles cannot be avoided because they are part of the functioning of the economic system.

As they point out, there are a few prerequisites for bubbles, as observed in the recent crisis in the US housing market. The first one is the expansion of liquidity in the economic system. Additional liquidity, combined with the illusion of wealth among market participants, can trigger a simple economic mechanism: more buyers bid for the assets, demand exceeds supply, and prices go up. If optimism continues, initial rises in price generate expectations for further rises and create a bubble. Price increases will continue until market participants realize that their expectations are not sustainable and sell their assets, resulting in a reverse movement and a downturn in the economy.

Liquidity broadly speaking

The two UBS economists point out that the definition of liquidity needs to be broad enough to include the different ways in which liquidity can be generated: not just through cash, but also through what they call "shadow money," or liquidity driven by financial market instruments (e.g. the lending activity based on asset collateral). In fact, the expansion of liquidity behind the 2008/2009 financial crisis was driven, in particular, by low interest rates and an expansion of shadow money.

The American economist, Hyman Minsky (1919 – 1996), argued that economic stability in itself engenders crises. He explained that in an increasingly stable and reliable environment, – the 'Great Moderation,' [2] for example – individual market participants, be they individuals or companies, will take on more risk. This results in additional borrowing through credit financing (leverage) and typically increases returns in stable times. According to Minsky, this type of credit growth first leads to strong economic expansion, then to euphoria and ultimately to bubbles.

Another prerequisite is a willingness to bail out. The US Fed has a long tradition of successfully bailing out the economy. This tends to induce the perception that the risk-taker will bear little or no consequence of his risk-taking activity, leading to a diminished risk perception.

The role of central banks

Can central banks counteract bubbles by preventing an expansion of liquidity in the system? Central banks can influence money supply. However, so far, their mandate has been to control consumer price inflation (CPI), not asset price inflation. Factors, such as lower production costs due to relocation of production to emerging markets, have kept consumer price inflation under control in recent decades, and central banks have been able to reach their CPI target and keep interest rates low. However, a loose monetary policy created additional liquidity in the economy, which flowed into asset markets, thereby producing favorable conditions for a bubble.

Whether central banks should also target a certain level of asset price inflation remains open. In any case, this would not be an easy task. First, even if they were given the authority to control asset price inflation, central banks would only have an indirect impact on asset price levels. They can directly influence interest rates, but the impact of their action on asset prices can be limited or delayed.

Longchamp notes the implications of determining an accurate level of asset price inflation in the long term. For example, one of the most widely accepted methods to value a stock, the dividend discount model (DDM), values the share price of a corporation based on the discounted value of its expected future dividends. "This is valid in the short term, but in the long term it is of limited accuracy because of the assumptions it makes on the level of interest rates. Determining a target for asset price inflation in a few years' time requires making assumptions."

Weisser adds that it is also a societal issue: "Setting a target for asset price inflation means limiting increases in investors' wealth. On the other hand, allowing asset price inflation distorts the distribution of wealth, as it enables an increase in wealth only for those who already hold the assets."

What then needs to be changed in the economic system to avoid excessive rises in asset prices? Mainly two things, according to the UBS economists: liquidity expansion would have to be limited, and the rules of the game would have to become more transparent so that risk perception is improved among market participants. Longchamp concludes: "Risk takers need to be aware that if they incur losses, the price to pay can be very high, and there is not always a way out."

The next bubble will show whether participants in the economic system have really learned from past experiences.

[1] One prominent "bubble-ologist", Charles Kindleberger, records 46 important financial bubbles from the early 1600s to 2000 in his study, Manias, Panics, and Crashes: A History of Financial Crises.

[2] The Great Moderation was a phrase used by Ben Bernanke in a 2004 speech referring to a substantial decline in macroeconomic volatility over the past twenty years.

So after some arena games recently, I've noticed a deficiency in my ability to be aware of cast bars on Gladius.

For example: I'm hitting warrior, holy pally that's behind me and out of my view is bombing him with holy lights. I should be charging these holy lights but I'm tunnel visioned on to warrior's health bar so that I'm not noticing Gladius cast bars.

I'd greatly appreciate it if people would be willing to share their arena UI set ups so I can learn from you guys. Here is mine, though admittedly its my pve setup (I'm at work right now):  /node/7765

Basically, my Gladius Frame sits right on top of my Pummel/Disarm/Hamstring Buttons  in that little floating bar I've got going on.

One thought I've had is perhaps moving my gladius frame to be right on top of my Omen and Recount Locations...but even then I'm not sure I would be naturally looking there to be able to watch non-target cast bars.

Greatly appreciate any suggestions to help me with this. It's a clear flaw in my game and I want to fix it somehow. Thanks

This is not a BIS discussion (far from it), but I did some excel number crunching to see just how high a crit chance a mage can reach in currently available gear. My results were rather amusing (if I did the math correctly):

In currently available gear, mages can reach over 100% critical strike chance on the fireball spell. I calculated the crit ceiling (give our take 1% margin of error) to be 101.44%. The gear set required to reach this rate, however, would be well under hit cap and at a pretty low haste rating (<200).

The gear set I compiled to reach the highest base crit rate before talents and buffs is linked here: http://www.wowhead.com/?compare=47524;47758;47762;47759;47760;47694;45493;47587;45236;47977;49234;47237;49486;45518;47946;45170

The methodology with this gear set is to load up only on items that have both Crit rating as well as Spirit (boosts crit rating with Molten Armor). There are a couple of pieces in here that do not fit this methodology, but must be put in to fit an essential set bonus.

That said I'm going to make a hybrid build model off of this template and attempt to reach as close to 100% crit as I can while being hit capped in 25m raids + at a respectable haste rating (~450), and might start using some NRP towards this set. I wouldn't be going for this necessarily as a "main" raiding spec.

The base crit rate offered by the 100% gear set is 65.44% (on Fireball). This 65.44% includes:

• 2PC T9 Bonus - which, when used with Molten Armor, provides 70% of your spirit as critical strike rating


• Human Racial - +3% spirit


• Student of the Mind 3/3 - +7% Spirit


• Typical 25M Static and % Stat Buffs including Arcane Intellect, Imp MotW, Divine Spirit, BoKings, Earth and Moon / Elemental Oath


• Every Single one of the 13 gem slots being filled with +20 crit or +34 crit dragon's eyes for JC's

Additional Buffs/Debuffs/Talents that boost Fireball Crit Chance from 65.44% to 101.44% include:

• Glyph of Fireball (5%): http://www.wowhead.com/?item=42739


• 4PC T9 Bonus (5%)


• Improved Scorch Talent (3%): http://www.wowhead.com/?spell=12873


• Critical Mass (6%): http://www.wowhead.com/?spell=11368


• Pyromanic (3%): http://www.wowhead.com/?spell=34296


• Focus Magic Trade with Mage (5-6%): http://www.wowhead.com/?spell=54646


• Improved Scorch Debuff (5%): http://www.wowhead.com/?spell=12873


• Heart of the Crusader (3%): http://www.wowhead.com/?spell=20337

I wonder what kind of rotation this would entail...I guess it would be Scorch, Fireball, Hot Streak, Hot Streak, Hot Streak, Hot Streak, etc, etc, etc....

BIG @SS EDIT: In the gear set above, I forgot a very important component - enchants.

These are the ideal enchants to boost crit rate:

• Arcanum of Burning Mysteries (20 rating): http://www.wowhead.com/?item=44159


• Greater Inscription of the Storm (15 rating): http://www.wowhead.com/?item=44135


• Brilliant Spellthread (20 spirit = 24 spirit after % stat boosters = 18 rating) http://www.wowhead.com/?item=41602


• Icewalker (12 rating): http://www.wowhead.com/?item=38986


• Enchant Chest - Major Spirit (15 spirit = 18 spirit = 13 rating): http://www.wowhead.com/?item=38928

These enchants yield 1.83% critical strike chance, pushing the total to 101.44% + 1.83% = 103.27% - barring any boss level spell crit chance reductions (which I have found to be inconclusive)

This thread made me regret how bitter and cold I can be in-game sometimes...

http://forums.worldofwarcraft.com/thread.html?topicId=20131897636&sid=1&pageNo=1

Maybe its cause the only whispers I get are people asking for portals non-stop =T.

We should have official Downfall "Do something nice for a stranger" day...or maybe I'll just do that on my own

(COMMENTS POTENTIALLY NSFW)

So I am headed to Las Vegas in the middle of November for a friend's birthday party.

Now, I've been to Vegas every year for the past 4 years.

I know about the Rhino.

I know about the gambling.

I know about the buffets.

I don't give a f*ck about Cirque du Soleil

This year, we're trying to branch out into new, non-traditional, yet fun Vegas activities. So, if you're a Vegas afficianado, or if you've even had a good isolated experience in Vegas, I'd love to hear what you did.

Basically, LF unique vegas experiences for me to try out. If its NSFW, then maybe a private message would be better =).

Much appreciated all!

If most of your savings are in a high-yield savings account or (even worse) under your mattress...you're not preserving your hard earned cash...you're losing it.

Consider this...

The current yield on an ING Direct savings account is 1.98%. The long-term inflation rate in the United States is just north of 2%. That means, every year (at this rate) you are losing 0.02% of your purchasing power. And that's BEFORE taxes.

Assuming a 35% interest income tax rate, your effective after-tax yield on that ING Direct savings account is 1.29%, which means your losing about $0.71 per year on every $100 you put in that savings account.

There are alternatives, but before I mention them...keep this is mind: 

There is no such thing as free money. Any profit requires SOME amount of risk

Now, I work with stocks on a day to day basis, and I'm not advocating it to those that are at all risk averse. No one knows where the hell the market is going these days - even if stocks are generally a good long-term investment.

However, you can effectively save without taking excessive risk.

Municpal Bonds are typically unpopular investment vehicles in normal economic times because

A) people don't understand what they are

B) people don't make money selling them to you

and C) they seem relatively unsexy

Basically, when you buy a "muni" you are assuming the debt obligations of the state or city that is offering that debt. They use your money for public services, utilities, infrastructure building etc etc.

What is the risk? That city or state goes bankrupt and is unable to pay its obligations.

How often has that happened? Wel...besides California, no muni has come close in this current economic crisis (I believe). And even California's IOU's are being backed by private institutions.

So...taking the New York muni for example, NYF is a municipal bond ETF. It is currently yielding 4% or so. But here's the kicker. Muni bonds CAN be triple-tax-advantaged, meaning exempt from taxation at the city-state-federal level.

SOOO, to find a 4% after-tax yield, you would need to find an investment or savings account that yields somewhere around 7%...good luck.

For all you people stuffing your mattresses with cash...I think the statistical probability of your house getting burglarized is greater than the chance of a major municipality going bankrupt.

SOOOOO...if you are relatively risk averse, but are looking to NOT lose money to the gods of inflation and taxation...look into muni bonds....there's my RL tip of the week.