Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Saturday, August 23, 2014

One door closes, another one slams in your face

Welcome new readers, also welcome old readers.  Up until now this has mainly been a politics and economics blog.  From now on in, it will also be a travel blog.  There may even be pictures!  But perhaps not.  In the meantime, the fact that I am no longer conflicted out because of my day job means I can do a few more things about newsworthy issues of the day and specific things to do with banking.

For example, our Felix's latest article on Silicon Valley deals and how they prove that banks are redundant and so on and so on. On the one hand, I agree with a lot of it, because I've always thought that M&A advisory was a really hinky part of the industry (occasional reader - not you! you were great mate! those other guys!). But on the other hand, I would read from the welter of Silicon Valley deals that have been consummated without Wall Street help, a simpler underlying truth - that there are a lot of very good companies which simply have no business being part of the public quoted capital market and that for the first time in about twenty years, a lot of these companies are not being part of the public quoted capital market. This seems like the system working, for anyone whose career started earlier than about 1997; it would be better if Wall Street had explicitly said that WhatsApp at $10bn was not a suitable investment for anyone's retirement savings, but if they Just Don't Get It and therefore Miss The Deal, then that works too. In my view, a decent next step would be to recognise that companies like Facebook (and even possibly Google) probably shouldn't be troubling the stock market either.

This isn't a slam on tech, far from it.  There are lots of really great industries that should never be quoted companies and should not have investment banking advisors talking them into and out of deals.  For example, investment banks.

5 comments this item posted by the management 8/23/2014 12:56:00 PM

Monday, April 21, 2014

Secular stagnation and such ...

I put this in the comments on Brad's site

I think the problem here is more of this gross substitutability stuff and marginal thinking that I am always going on about. The idea that people seem to be stuck with is that an increased weighting to equities and high-yield debt in some portfolios is an "increase in risk" and that this in some way increases the danger of another financial crisis. But a) the extent to which it's actually happened is hardly measurable, and b) it isn't, any more than a budgerigar might grow up into a tyrannosaurus rex. They're different things.

The credit bubble and house price crash weren't random outcomes selected from the underlying distribution of financial asset returns; they were specific events with their own causes, which is why they appeared to be Black Swans to people who weren't paying attention to those causes. That's not going to happen again, or at least not in that specific way, not for a while.

As far as I can see, Brad, you're more right than the people worrying about financial instability, because they're looking at this from a partial analysis - they're looking at either the (small) empirical evidence of people increasing holdings of credit-risk securities or the theoretical arguments to the effect that the private sector has an incentive to increase those holdings and saying - increase risk equals bad.

You, for your part, are looking at the system as a whole and saying that there's something close to a conservation law; that duration risk has gone down, while credit risk (and equity risk) has gone up, for the private sector. 

Stein's view seems to be that the total amount of "risk" can go up if the total amount of *activity* goes up (which is true, activity is risky), and that in so far as the QE channel works by encouraging the private sector to buy credit- and equity-risk securities and thereby ... (cough mumble) investment in real entrepreneurial projects, then it's possible that QE might encourage the kind of over-leveraged risky structures that lead to financial fragility.

My view is that, while your view and Stein's are clearly better than the partial view, this is all the sort of blackboard thinking you're going to get if you start off by making the mistake of drawing supply and demand diagrams denominated in generic "risk"! The attraction of cash isn't that it's "safe" - ten year floating rate government bonds would have zero duration risk, but they wouldn't be cash. The reason that people hoard cash in liquidity traps is that it's *liquid* - it preserves your optionality, and combines zero risk of being unable to meet nominal liabilities, with instant convertibility into consumption or investment goods. Cash is what you want to hold when you don't know what to do next.

And people's decision about what they want to do next are driven by animal spirits and expectations about an unknowable future. The kind of thing that makes people take non-ergodic, non-insurable, non-hedgable entrepreneutrial risk is really not very related to the kind of thing that makes people move the equity weighting of their portfolio from 40% to 45%. 

If, at some future date, activity picked up and we had a normal investment environment and yields were still at 2%, then this might be a problem, as it would mean that people would be able to finance very low-yielding projects, and as a result would be vulnerable to comparatively small real shocks to either their refinancing cost or their cash flows. But this is to assume that future massive mistakes would be made.

1 comments this item posted by the management 4/21/2014 10:50:00 PM

Wednesday, April 02, 2014

A minor squib about Ukraine


A few weeks ago: Europe and Russia were politicking over whether Ukraine should be considered to be Finlandized to the EU sphere of influence or to the Russian sphere of influence.

Now: Basically the same diplomatic and grand political struggle, over Eastern Ukraine.

Remind me again who looks weak and silly and has been humiliated?  It looks to me as if, in sheer territory-lost-versus-gained metrics, there's a clear winner and a clear loser among the two imperial powers on the European continent, to the tune of half of Ukraine.
2 comments this item posted by the management 4/02/2014 12:08:00 AM

Tuesday, April 01, 2014

An absurdly simplistic point about High Frequency Trading

This seems like such an obvious point that it surprises me I haven't seen it being made over and over again, presumably in industry publicity material. The central anecdote of Michael Lewis's book (and a story that very often forms the centrepiece of an article about high frequency trading), goes as follows:

"Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama’s computers worked as he expected them to. Suddenly they didn’t. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish."
To make his point, he asked the developers to stand behind him and watch while he traded. “I’d say: ‘Watch closely. I am about to buy 100,000 shares of AMD. I am willing to pay $15 a share. There are currently 100,000 shares of AMD being offered at $15 a share — 10,000 on BATS, 35,000 on the New York Stock Exchange, 30,000 on Nasdaq and 25,000 on Direct Edge.’ You could see it all on the screens. We’d all sit there and stare at the screen, and I’d have my finger over the Enter button. I’d count out loud to five. . . .
“ ‘One. . . .
“ ‘Two. . . . See, nothing’s happened.
“ ‘Three. . . . Offers are still there at 15. . . .
“ ‘Four. . . . Still no movement. . . .
“ ‘Five.’ Then I’d hit the Enter button, and — boom! — all hell would break loose. The offerings would all disappear, and the stock would pop higher.”
At which point he turned to the developers behind him and said: “You see, I’m the event. I am the news.”

Fair enough. But … tell me about the other side of this trade. Brad Katsuyama, in this story, had to pay a few fractions of a cent more for the 100,000 shares of AMD stock he wanted to buy, because high frequency trading firms saw his order coming and took out the sellers. But if he paid a few fractions of a cent more, then someone else who was selling the stock received a few fractions of a cent more. Here's a story you don't ever see told.

"One day, he came into work and started trying to sell a block of stock at $15 a share. There wasn't much interest at that price and a bunch of offers at $14.9995. Brad knew he needed to get the trade finished, so he sighed and got ready to lower his quote. Just as he was about to press the button, though, a shoal of high frequency traders took out all the offers below him and an institutional investor paid up the full $15! He said hurray".

Nobody would think that way. If you put in an order and get a fill which has a bit more slippage [1] in it than you were expecting, then you start looking around for explanations of why this thing could have happened. If you get an unexpectedly good fill, then you tend to presume that this is just because you're such a great trader.

All of which certainly isn't my general view on HFT; I have always thought that the whole business of payment for order flow was hinky in the first place, and I've always been suspicious of entities which behave like liquidity providers but don't commit to providing liquidity when it's needed. But by definition, when the price moves away from one trader, it's moving toward another one. So I don't think that estimates of the "cost" of the presence of high frequency traders can be supported based only on anecdotes of bad fills.

[1]("slippage" = "the difference between the price you saw on the screen when you made the decision to trade, and the price where the order actually gets filled")
3 comments this item posted by the management 4/01/2014 11:59:00 PM

Friday, March 21, 2014

If you want to send a message, use Western Ukraine

My analysis of WTFF is going on in Ukraine at the moment, and why everything is so god damned chaotic.

My basic game theoretic analysis comes from a game which we used to call "What's the Time Mr Wolf", but has a bunch of other names. Basically, one kid stands facing the wall, and the rest of you creep closer and closer, with the tension rising, until the kid facing the wall decides everyone's got a bit too close, then he suddenly turns round and tries to grab one of the other kids and beat the crap out of him, as everyone runs away.

The geopolitical version of this game which we're interested in is called "chipping bits off the former Soviet Union", and I am in favour of our playing it because it expands the imperial power which I am part of, and contracts the imperial power which is the most obvious danger to me. I am actually quite hawkish when it comes to cold wars, it's the fighting kind I don’t like. One of the consequences of the EU playing the game of chip-bits is that from time to time we're going to over-reach and provoke some sort of reaction. After all, if one looks at this from Putin's point of view, he's in a really unenviable situation; taking a look at the way that the EU's borders have moved since 1989 you can sort of see how someone whose view of the world was not our own might see the EU as a totally out-of-control expansionist imperial power.

Another way of looking at this is to remember that people judge others by the standards of their own behaviour. Putin is a bit of an authoritarian maniac, so he presumes that other people are also authoritarian maniacs. If your worldview is that of a maniac, and you see what you believe to be a fellow maniac behaving like the EU does, it's worrying.

But as I say, this is normal diplomatic politics. And we're actually pretty good at it, having chipped off the Baltic states and (in my opinion) shifted the real hard-line "nuclear" boundary of NATO from Berlin to eastern Poland. You have to expect setbacks. What seems to have changed is the way in which setbacks are handled.

So this is what happened in my view. We were doing our usual game of extending the hand of friendship, the latest move in a two-decade effort to chip Ukraine away, but we made the mistake of thinking that Yanokovych was a crook we could do business with, rather than a Putin lackey. Putin, for his part, made the mistake of believing that Yanukovych was a lackey who could deliver his province, rather than an over-reacher who had more reason than most to not make the mistake he did about the willingness of the Ukrainian population to be used in this way. The Ukrainians, as far as I can see, played a blinder and made no mistakes at all - I would personally question their taste in laughable crooks as a political class, but you play the cards you're dealt, and we had Berlusconi after all.

At this point, there was a clear off-ramp and everyone, including me, was expecting that it would be taken. Around the time that Yanukovych fled, everyone sensible ought to have been thinking that the EU had overreached a bit, and we were at the stage in which the rules of the game dictated that everything had to be rowed back quickly.

What was needed was for someone (probably Baroness Ashton) to go and deliver the message "Don't worry Vlad, not while the Ukrainian people have holes in their arses will they be members of the EU and as far as NATO membership is concerned they are somewhere behind North Korea. We fully appreciate that Ukraine is your back yard, not ours and we have no interest in doing anything that makes you feel threatened". At which point it could all have been stood down in a cloud of bad temper, but kept relations on the same broadly productive track they were before.

Thing is, this is now the post-Wikileaks era. And the trouble with the little speech I indicated in the last paragraph is that a) it's a total lie and obviously so, and b) it involves selling out the Ukrainian opposition in a really unedifying way - we keep financing these people and providing the expectation of help that we're never going to deliver, in order to use them as pawns in our game of chip-bits, and I suspect they might kind of know that, but we can't rub their faces in it and expect to keep their support. There is no way that any official is going to be prepared to have that speech attached to their name, and so no way anyone's going to do it if there is a risk of it being plastered all over the internet (and there is; EU diplomats have screwed up their comms at least once already and seen embarrassing conversations appear in the papers). There's a symmetry too here - there are all sorts of threats and deals that Putin might want to communicate but can't.

So the normal channels of diplomatic communication aren't working, and people are working blind, while trying to communicate strategies and alternatives to each other by the traditional Cold War means of costly signalling theory. My answer to the question of "why did Putin invade Crimea?" is that it is quite likely that he did it "in order to transmit a single bit of information". We're trying to use various forms of sanctions as a communication tool, but we haven't got an agreed code to match them up with - we need to develop a set of bidding conventions, like bridge players have. My guess is that because it has now become someone's job to develop a new substitute diplomatic communication channel, and fast, it will get done, and things will get a lot more normal. But it's also possible that they won't, and that we will be seeing a lot more use of the tactic of annexation of territory as a means of self-expression.
4 comments this item posted by the management 3/21/2014 04:43:00 AM

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