I said, pressure drop
Oh pressure, oh yeah
Pressures gonna drop on you

        -- "Pressure Drop", Toots & the Maytals (1969)

Not to get all weather-y again, but I was fairly gobsmacked by some data out of Hurricane Ike this morning. Overnight the minimum central pressure dropped precipitously, touching 938 mb, down from 984 MB a scant 12 hours earlier. That caused a crazy intensification of the storm, with winds spiking up to a sustained 145 mi/h, up from 80 mi/h.

That is, in a word, nuts. Central pressure dropping 4.1 mb/hr during the period is faster than pressure tumbled during Hurricane Wilma, back in 2005, which eventually fell to 882 mb and peak winds of 175 mi/h. I'm not suggesting Ike is likely to do the same -- there are oodles of variables in play -- but it does show how unusual such precipitous pressure drops are in Atlantic hurricanes.

I keep coming back to a comment from Mark Cuban in the weekend Washington Post. When asked, among a host of others, what book he would recommend to people trying to make sense of the current financial/economic turmoil, amidst a sea of high-tone choices from economists, investors, and others, here was Mark's answer:

I don't think there is such a book. In my humble opinion, people who actually believe they can understand all the issues are the ones that got us to where we are today. In reality, there are so many variables and so little data, it's all a guess. I don't think a book exists that can explain it. Is there a book out there called "No One Has a Clue What Is Going On and the Whole World Is Guessing"?

No Mark, there is no such book. No-one knows anything and we are making this up as we go along. People continually act surprised at how many big-brained sorts missed the current market conflagration as it developed, but should we really be surprised? That's what happens every time, and feeble attempts to apply the lessons learned last time around almost always lead to focusing on things other than what is causing the new problem.

I know, I know, it sounds nihilistic. But in some sense it's liberating: If no-one truly knows anything -- beyond the simplistic bromides, like plant your corn early, avoid excessive leverage, etc. -- then the world is your Etch-a-Sketch, isn't it?

When wildfires burn a landscape, it's not all bad. It cleans out underbrush, helping the next generation of plants and trees emerge. Wildfire is also required by some plants to propagate, like various species of chaparral, whose seed pods only open under the kinds of heat created by wildfires. Those species are, in a sense, fire-adapted.

Saying the preceding, however, is not the same thing as saying that all wildfires are good. Highly infrequent wildfires -- usually caused by over-aggressive fire suppression policies -- tend to be much more severe, with larger areas burned, and more plants burned right down into the roots, increasing the cycle time for landscape recovery. We had that happen in southern California in 2003 with the Cedar wildfires, but the Yellowstone fires of 1988 are good examples too.

On the other hand, overly frequent wildfires -- usually caused by the introduction of an ignition source (read: humans) into a wild landscape -- come with other problems. In California, for example, the dominant coastal brush, chaparral, requires at least a few years to germinate and grow. Wildfires that happen in the same area in less time than it takes for new chaparral to re-establish itself can destroy the ecosystem. The fires suppress natural regrowth, while allowing fast-growing (and often foreign) plants to take hold, which in turn prevent chaparral from ever emerging. These new plants tend to be forms of wild grass, which give a landscape the superficial appearance of recovery, but are almost always even more fire-prone than the fire-adapted ecosystem they have supplanted.

In short, infrequent wildfires tend to be catastrophic, but overly frequent wildfires cause what fire ecologists call "type conversion": the original plants are replaced by new species, and the new plants tends to be more prone to frequent fires. In other words, frequent fires make an already fire-prone landscape even more dangerous.

I got to thinking about this in a capital markets context recently. We have gone through a series of capital market conflagrations in recent years, with each coming increasingly speedily on the heels of the one before it. There is the current banking/mortgage crisis, the dot-com crisis before it, the Southeast Asia troubles, the LTCM meltdown, the S&L Crisis, etc. It has been one thing after another, each coming more quickly.

It helps to look at historical patterns. We had financial crises in 1873, 1884, 1890, 1893 and 1907. That series culminated in WW I and the Great Depression, after which we had no financial crises from 1941 to 1971. Since then, however, we have had crises in 1972, 1978, 1988, 1998, 2000, and 2007/8, each of which has gotten more dire as measured in total losses, as well as more global, in terms of markets affected.

What is the cumulative impact of all these modern financial crises? Far from making markets more resilient, I argue that they are making markets more, not less, prone to crises. It is happening because market participants are changing, as are the methods and styles by which they trade. Think about it. If you fail to thrive -- i.e., don't make money -- you either get eliminated or find something else to do. You are, in a markets sense, as readily replaced as any plant overrun by invasive species after frequent wildfires. The result, however, is a market more -- not less -- prone to wildfires.

Sound familiar? It should: I think we have type conversion underway in capital markets. Markets will always be prone to wildfires and crises -- that is part of their essence -- but over-frequent conflagrations are causing native species to be replaced, newly making markets even more crisis prone than most people understand.

More reading:

• Effects of invasive alien plants on fire regimes. Brooks, M.L., et al. 2004. Bioscience 54:677-688.
• Fire in America, by Stephen Pyne

Am I the only one irritated by the fawning treatment given Pimco's Bill Gross and his commentary today? His implicit threat of a bond buyer's strike -- he wants the Fed to get off its ass and backstop Freddie/Fannie -- is so deliriously self-serving. He is into mortgage-backed bonds and FHM/FRE up to his neck, and now he wants Treasury to bail him out or he'll stop buying? How lovely. And, oh yes, I'm highly fond of the "new balance sheet" euphemism than he coins in the piece.

[via Pimco]

A few quick things to empty out my brain:

• A mind-blowing SocGen report is making the rounds that says an "economy and equity market meltdown imminent". While SocGen's strat team are always apocalyptic, this one is particularly spooky -- and nicely timed, given today's kerplunk in capital markets
• Talked to a high-end San Diego landscaper today who had 145 employees two years ago, and has 32 today. Things are that bad, even at the high end.
• There seem to be a lot of people in agreement that Pimco's Bill Gross has finally crossed over from talking his book to trying to play shadow Treasury
• Latest SpendingPulse data shows U.S. gas spending getting closer to year-ago levels
• TheStreet's Banks & Thrifts screener is kinda nifty (TSCM)