The dragon kings of Didier Sornette and the skill of predicting financial bubble bursts

Chances are you have never heard of Didier Sornette. Chances are that the next time you hear of him, you will be significantly poorer — unless you listen to what he says now.

Sornette is the professor of entrepreneurial risks at theSwiss Federal Institute of Technology (ETH Zurich). His research focuses of the prediction of crisis and extreme events in complex systems. His work covers earthquake physics, dynamics of success on social networks and complex system approach to medicine. However, the part that attracts market attention is what he does at the Financial Crisis Observatory, which is to test the hypothesis that financial "bubbles" can be diagnosed in real time and their termination predicted probabilistically.

In other words, he attempts to find when the next big fall in the financial markets can occur.

The term "bubble" refers to a situation where excessive future expectations lead to rise in prices. Sornette identifies speculative bubbles as arising from a confluence of two factors — factors that drive initial demand — say, new technology or perception of reduced market risk. This is followed by "amplification mechanisms", where a large increase in asset price is followed by higher demand as investors think that further increases in price will follow. This "super-exponential" acceleration in prices due to a positive feedback (or "pro-cyclicality") leads to formation and then maturation of a bubble in finite time.

US debt crisis: Stock markets just can't wait to hit new highs

NEW DELHI: 'Irresponsible America' is keeping the world on a ledge. Will it raise the debt ceiling, or will it default? It will reach a last-minute agreement, feel most analysts. But there is a 5 in 1 chance that the world's largest economy decides to default, says Byron Wien, VC at Blackstone Advisory.

"There is a 20 per cent probability that the US government will default on its debt," he told ET Now in an exclusive interview.

The implications are being discussed the world over, but so far there is no clear verdict. Will the US Treasury Securities lose their validity? Or will the default be restricted to the US government's domestic obligations? The answers are not in yet.

What started as a bickering between the Donkey and the Elephant (to be read Democrats and Republicans, respectively) over President Obama's highly vaunted healthcare programme has now turned into a battle of wills; and no party is at this stage in a position to stand down.

Australia to raise debt limit to A$500 billion, target wasteful spending

Australia's new conservative government plans to raise its debt ceiling by two-thirds to A$500 billion ($483 billion), Treasurer Joe Hockey said on Tuesday, heading off concerns the country could reach its limit before Christmas.

"The debt limit needs to be set so as to provide sufficient headroom to ensure there is stability and certainty for the financial markets about the government's capacity to finance its operations for the foreseeable future," Hockey said.

"We need not look any further than the recent events in the United States to realise how imperative for stability and certainty is for confidence."

Brinkmanship over raising the U.S. debt ceiling earlier this month partially shut down the federal government and roiled financial markets before a 11th hour deal was hammered out.