How does the risk of default in California or Thailand get spread throughout the world, causing problem in money market funds in Europe and Florida? Yes, we can trace the linkages now, but was it possible to predict the crisis beforehand? And can we use what we learn to predict and hopefully hedge ourselves from the next crisis? Why do these things seem to be happening with more frequency? This week we are going to look at some economic theories which will give us some insight into the above questions. As it turns out, the more that individuals hedge their risk in economic markets - the larger the network - the more the entire system is put at risk. There is a lot of ground to cover, so we will jump right in.

Before we get to the economic theory, let's review part of a letter I wrote in April of 2006 discussing chaos theory, as it will give us a useful mind picture to understand the latter part of the letter. This was part of a letter where I laid out my thoughts that we would indeed experience a crisis in the future along the lines we are now seeing.

We are going to start our explorations with excerpts from a very important book by Mark Buchanan call "Ubiquity, Why Catastrophes Happen." I HIGHLY recommend it to those of you who like me are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory and critical states. It is written in a manner any layman can understand. There are no equations, just easy to grasp well-written stories and analogies. www.amazon.com

When can we once again return to the stock market with some long term confidence? What's up with bonds and global reflation? This week we continue to meditate on the risks of lazy investing and single derivative thinking, ranging far and wide in an effort to understand the world in which we find ourselves.

While you are reading this letter on Saturday, in theory I will be setting up the grill for a little weekend Texas-style barbecue with good friend Bill Bonner in his chateau (that is the French word for money pit) in Ouzilly, France. Bill is quite bearish on most things economic and political, but he has way too much fun along the way to the fin de siecle to be considered a true pessimist. (Being with Bill gives me an excuse to drink good wine and write words like fin de siecle. See more below.)

What an amazing week. The data deluge as I came back into the office from Florida was staggering, and I write this letter late at night after a day of reading and thinking.