tag:blogger.com,1999:blog-87488892024-03-14T16:47:00.629+00:00Global Trader's DiaryThis is a trading diary containing my views on international financial markets and economic news. I focus on the relationships between bond, currency, commodity and equity markets across countries. All ideas and opinions expressed here are shared for educational purposes. THESE ARE NOT RECOMMENDATIONS!Michaelhttp://www.blogger.com/profile/17566495209364609442noreply@blogger.comBlogger497125tag:blogger.com,1999:blog-8748889.post-43781562637932084202012-02-25T06:40:00.000+00:002012-02-25T06:42:42.645+00:00Weekend Links<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="http://www.woostercollective.com/assets/img/content/posts/ja3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="640" src="http://www.woostercollective.com/assets/img/content/posts/ja3.jpg" width="480" /></a></div>
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How many <a href="http://www.economist.com/node/21548255">years has the economic crisis set back</a> the most affected countries?<br />
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China's foreign exchange reserves <a href="http://www.ft.com/intl/cms/s/0/fb5422ea-57f9-11e1-bf61-00144feabdc0.html#axzz1nKgDKiRo">move the Euro</a>.<br />
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Is an<a href="http://freekvermeulen.blogspot.com/2012/02/best-degree-for-start-up-success.html"> engineering degree better than an MBA</a> if you plan to start a company?<br />
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<a href="http://www.marketingpilgrim.com/2012/02/mobile-ad-dollars-versus-time-spent-the-great-divide.html">Marketing dollars vs. the time spent by consumers</a> on different categories of media.<br />
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With more investors entering the market and less interest in homeownership, the <a href="http://feedproxy.google.com/~r/CalculatedRisk/~3/wtoQBjE7KOM/lawler-declining-inventory-of-existing.html">US is seeing the number of homes rented increase</a>.<br />
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<br /></div>Michaelhttp://www.blogger.com/profile/17566495209364609442noreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-30604935822709943062012-02-02T13:40:00.001+00:002012-02-02T13:41:59.377+00:00Debt policy follow up<div dir="ltr" style="text-align: left;" trbidi="on">
I recently wrote about <a href="http://globaltrader.blogspot.com.au/2012/01/debt-and-occupy-wall-steet.html">the importance of the accumulated debt in the worlds current financial troubles</a> and am heartened to learn some of the mainstream is not thinking that differently.<br />
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Martin Wolf both agrees that central banks need to pay more attention to aggregate leverage levels and that tax codes should remove incentives that encourage debt. That these changes made his short list of<a href="http://www.ft.com/intl/cms/s/0/c80b0d2c-4377-11e1-8489-00144feab49a.html#axzz1lECUk5fm"> 7 ways to fix the system</a> is very encouraging.<br />
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Paul Krugman also points to the growth of debt as<a href="http://krugman.blogs.nytimes.com/2012/01/24/a-tale-of-two-bubbles/"> the primary reason the economy was unsound</a> from 2003 to 2007. Repeating this simple narrative will eventually lead to enacting the prescribed solutions.<br />
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Now that the <a href="http://mainlymacro.blogspot.com.au/2012/01/uk-growth-reveals-major-macroeconomic.html">failure of austerity</a> is <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CCEQqQIwAA&url=http%3A%2F%2Fwww.guardian.co.uk%2Fbusiness%2F2012%2Ffeb%2F01%2Fimf-austerity-harming-greeve%3Fnewsfeed%3Dtrue&ei=L4wqT-DqC6uziQeH8OXPDg&usg=AFQjCNFubzJJSwzbdWpuyyT-rj8NXIRQIw">rapidly</a> <a href="http://www.eschatonblog.com/2012/01/thanks-idiots.html">becoming</a> <a href="https://news.google.com/news/url?sa=t&ct2=au%2F0_0_s_3_0_t&usg=AFQjCNFnYBdYVI-_7w3p7RdxjNIi9BgzcA&did=a5a11553e61ee3c&cid=8797799404614&ei=Po0qT4CgH8fdkAWKTg&rt=STORY&vm=STANDARD&url=http%3A%2F%2Fdrezner.foreignpolicy.com%2Fposts%2F2012%2F01%2F30%2Fare_we_at_a_focal_point_for_rejecting_expansionary_austerity">apparent</a>, I am hoping new policy measures will be aimed at the structural issues that led to debt build up while returning to the old standard practice (it became unfashionable in 2010 as I recall) of counter-cyclical monetary and fiscal policy.<br />
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<br /></div>Michaelhttp://www.blogger.com/profile/17566495209364609442noreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-89267946857426672342012-01-27T03:15:00.001+00:002012-01-28T02:03:47.702+00:00The MF Global fallout and other links<div dir="ltr" style="text-align: left;" trbidi="on">
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<li>I am surprised the markets shrugged off the <a href="http://www.ft.com/intl/cms/s/0/02ec3d4e-475b-11e1-b646-00144feabdc0.html#axzz1kbekrLAK">MF Global loss of client funds</a> so easily. I am hopeful that the end result will be tighter restrictions to prevent such losses in the future. Until this happens though I would have thought risk premiums might need to widen generally or a least some other brokers might suffer as customers gravitated towards the strongest.</li>
</ul>
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<li><a href="http://blog.rpdata.com/2012/01/how-has-the-rate-of-decline-in-the-aussie-housing-market-compared-with-the-us-uk-and-nz/">A retrospective on housing market declines</a> that looks at where Australia might be in that process. Real estate still seems expensive in Australia and with China likely to be shoring up its economic growth this year, I don't think AUD interest rates will be adding price support to housing.</li>
</ul>
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<li><a href="http://www7.gsb.columbia.edu/richman/sites/default/files/files/cdo_ratings_2011-12-28-AEA(1).pdf">A study that looked back at asset backed securities and their ratings histories</a> found that the securities included in CDOs later experienced worse ratings downgrades. The conclusion implied that CDO sponsors were exploiting some kind of information advantage to skew the results that the buyers experienced. This was the case even when controlling for yield which is where I would normally expect default expectations to be priced. The authors looked at the entire asset-backed universe but CDOs were concentrated in the housing and commercial real estate sector. I may have missed where the ABS sector was controlled for but if it was not controlled for I could see how warped investor demand for housing CDOs led to warped housing prices and ultimately very poor performance of housing ABS without needing asymmetric information between CDO sponsors and buyers. I don't know what really happened of course, but the explanation from the authors seems like an elaborate and difficult application of exceptionally good ex-ante judgement. Such good judgement is both valuable and rare so it is best applied with simpler strategies and fewer moving parts to depend on.</li>
</ul>
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<li>The Euro is getting whipped around by the <a href="http://www.businessweek.com/news/2012-01-26/euro-falls-as-greece-creditors-wrangle-over-debt-swap-agreement.html">vicissitudes of Greek restructuring talks</a> and <a href="http://www.efinancialnews.com/story/2012-01-26/hedge-funds-bets-against-euro-hits-20bn">record short interest in the Euro</a>. It seems to me the Euro goes down when it appears Greece will stay in the Eurozone. Many news stories seem to be attributing the opposite affect and equating a solution that maintains the current membership as reason for a strong Euro. Weakening makes more sense to me both with the growth through currency devaluation necessary to stabilise debt to GDP ratios and also the precedent set for the Euro if weak members leave. (update 28/01/2012: A good example comment on the Euro - "<span style="background-color: white; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px;"><a href="http://blogs.wsj.com/marketbeat/2012/01/27/euro-de-coupling-continues-but-not-for-the-reason-you-think/">A broadly weaker dollar is being sapped by the Fed’s dovish stance, which is lifting the euro and gold despite there being no resolution on Greece’s debt negotiations.</a>" The Euro is up against the JPY and AUD)</span></li>
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<li><a href="http://37signals.com/svn/posts/3084-watching-apple-win-the-world">Apples earnings report was impressive</a> but they might need <a href="https://plus.google.com/106413090159067280619/posts/Pb8E7XBwYGY">a new slogan</a>.</li>
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</div>Michaelhttp://www.blogger.com/profile/17566495209364609442noreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-20846676455975157572012-01-08T02:11:00.001+00:002012-01-08T02:37:19.742+00:00Debt and Occupy Wall Steet<div dir="ltr" style="text-align: left;" trbidi="on"><span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">I liked <a href="http://www.indyweek.com/indyweek/otherwise-occupied-what-price-revolution/Content?oid=2715801">this essay's</a> explanation of the </span><span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">zeitgeist</span><span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"> behind the Occupy movements.</span><br />
<br />
<span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">I think there is a simpler story though to be told about modern economic growth being driven primarily by increased private debt levels. (Update: my view expressed here is heavily influenced by <a href="http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/">Steve Keen's writing</a>.) It is less malevolent than the corruption of politics by money explained by the linked essay and simpler to address. </span><br />
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<span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">My story would be that constantly increasing debt levels of the past 3 decades created false demand that was unsustainable when the debt growth stopped. The extra demand smoothed out the business cycle while the debt grew creating a self fulfilling "great moderation" of stable dependable economic growth that allowed and incentivising high debt levels.</span><br />
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<span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">High debt levels benefit asset owners by driving up prices and lenders by increasing interest payments which also explains the shifts in wealth distribution. There was also a kicker to the wealth concentration at the end of the debt build up where "the 99%" were convinced to take on large debt loads to purchase houses which, as an un-productive asset, require either the owners salary or price appreciation to enable the interest payments.</span><br />
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<span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Recognising the current imbalances as a debt problem would add "</span><span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">eliminating</span><span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"> tax incentives for debt funding" and possibly add "managing the aggregate debt level" to the responsibilities of the world's central banks. </span><br />
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<span style="background-color: white; font-family: Arial, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">I don't think this is a difficult narrative for people to understand and I imagine most are aware of the increased presence of debt in their lives. While discussion of the government debt level is a popular media topic and the level of education loans is starting to make headlines there is much less discussion of the overall private debt level making me think that the majority of people are still looking for a return to the good old days of steady debt growth.</span></div>Michaelhttp://www.blogger.com/profile/17566495209364609442noreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-42634300047869123832010-06-26T03:23:00.002+00:002012-01-27T04:39:50.086+00:00Weekly summary: Stopped out of gold short<div dir="ltr" style="text-align: left;" trbidi="on">
I stopped out on the way back up through 1250 today. It tested down through its 20 day average on Wednesday but didn't stay below for long. There is some chance the bounce back was <a href="http://www.zerohedge.com/article/morning-gold-fix-june-23-2010">expiry related</a> but gold continued higher after the expiration. Any trapped longs from Monday's breakout have surely been stopped or replaced by stronger hands by now negating one of the drivers for <a href="http://globaltrader.blogspot.com/2010/06/short-gold-on-failed-breakout-and.html">the trade</a>.<br />
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The gold rally might get tested in the near-term with the Eurozone fright having past and China resuming currency liberalisation. I expected a bit more risk seeking this week as markets moved past the fears of a few weeks back but the results were pretty muddled. <br />
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<ul>
<li>Bonds are still pressing highs but momentum is ebbing.</li>
<li>Gold is similar with early weakness giving way to a weekly close near highs.</li>
<li>Equities are heavy but holding recent lows. It is tough to gauge the impact of the <a href="http://news.google.com.au/news/url?sa=t&ct2=au%2F0_0_s_9_0_t&ct3=MAA4AEgIUABqAmF1&usg=AFQjCNEmoz4OlTqtMDou-Cw0KS-I6by1zA&sig2=VK0LOIkfmKRSq-quiar2dg&cid=17593763813527&ei=SWolTODCCYiu6QPLr9jjAg&rt=MORE_COVERAGE&vm=STANDARD&url=http%3A%2F%2Fwww.google.com%2Fhostednews%2Fap%2Farticle%2FALeqM5gSoQryemBVOck24MppIzoZFbWWSAD9GIIEC00">US financial reform debate</a>, with banks trading relatively heavy but wider market moves not reacting to the news flow on that topic.</li>
<li>the Australian dollar and Canadian dollar should benefit a lot from stabilising macro news. Both got dumped more on liquidity than fundamentals when the Euro made lows. The movements this week support the story that stability is returning but only weakly with movements being a bit lacklustre. Action in the AUD may be slightly muddled by the Australian leadership change but the big news on that front is probably yet to come as the <a href="http://www.theaustralian.com.au/business/story/0,1,27322783-30538,00.html">mining tax negotiations</a> get underway. </li>
</ul>
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On the Eurozone fright, I don't think I had given enough weight to the idea the Germany could abandon the Euro. The smaller size of the PIGS, and particularly Greece, made me quickly assume that either Greek debt would be written down or Greece would leave the union. How can anyone benefit from a currency union where the strong members are encouraged to leave? Anyway, with the Euro keeping gains and moving up through the week my view may be becoming more mainstream.<br />
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On China, it seems like the world is still debating whether <a href="http://economistsview.typepad.com/timduy/2010/06/china-day-one.html">the announcement last weekend really means anything</a> (<a href="http://www.moneynews.com/StreetTalk/paul-Krugman-China-Currency/2010/06/25/id/363069">or this</a>). China is in an odd spot of wanting to dip a toe in with gradual currency movements but knowing that once its intentions clear the market will <a href="http://www.businessweek.com/news/2010-06-25/china-to-create-more-channels-for-yuan-use-central-bankers-say.html">front run the policy</a>. This makes timing difficult but ultimately it all appears to be heading toward a stronger yuan and <a href="http://blogs.telegraph.co.uk/news/peterfoster/100044829/china-hears-the-beat-of-a-new-generation/">stronger Chinese consumption</a>. This may uncover some domestic imbalances as it goes forward but near term this also points towards stability.<br />
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I also wonder if the traders aren't a bit too negative on the G20. The view seems to be that either there is <a href="http://www.cfr.org/publication/22486/chinas_calculated_move_on_yuan.html">nothing to talk about</a> or talks might degenerate into an <a href="http://www.reuters.com/article/idUSN2520059020100626">ugly round of finger pointing</a>. I expect politicians will err on the side of vague positive statements and keeping disagreements out of the public eye. Even acknowledging that the world can not return to the pre-2008 configuration of trade and capital flows might be viewed as above expectations.</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-32697929733647841602010-06-22T02:51:00.001+00:002010-06-22T03:34:13.983+00:00Short gold on failed breakout and potential for Chinese yuan appreciationI sold the August gold contract with a stop near today's peak. There are a few reasons driving the trade<br />
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1) I don't think the movements in gold are widely understood. I mentioned (on <a href="http://twitter.com/mrktblggr">Twitter</a>) Fred Wilson's article on why he thought <a href="http://bit.ly/d5mwPB">gold was a poor investment</a>. Fred was looking at gold as an asset and points out that unlike many other assets its only source of return is price appreciation. I think this misses the point that gold is more like a currency. <a href="http://www.econbrowser.com/archives/2010/06/gold_and_inflat_1.html">Jim Hamilton</a> reaches a similar conclusion, offering that gold's movements might best be explained by government bond purchasers worrying about the value of the money they are repaid in.<br />
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2) The typical reserve currencies - the U.S. dollar, the Japanese yen, and the Euro - all have varying degrees of the same problem. Their debt levels to GDP are historically high giving them incentive to devalue their currencies. Typically investors would hedge this risk in other currencies that pay interest rather than gold but there is a worry of policy contagion and likely a need to diversify across many currency options (of which gold is one) to find liquidity with the biggest currencies looking dubious. <br />
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Now we are getting to why I would short gold, since the statements above are bullish.<br />
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3) China is a large country with a vibrant economy and excess reserves. It is in some ways the opposite of the traditional reserve currencies with no risk of devaluation to meet debt obligations. Devaluation risks in China stem from its desire to maintain a weak currency to promote exports. That policy is probably <a href="http://mpettis.com/2010/05/don%e2%80%99t-misread-the-trade-implications-of-the-euro-crisis-for-china/">growing less viable</a>. They addressed this problem in 2005-2008 by allowing the yuan to appreciate. That policy of an <a href="http://ftalphaville.ft.com/blog/?p=266391">appreciating yuan is likely to resume now</a>. The yuan pays interest so to the extent investor can utilise it for hedging purposes it is a better alternative than gold. This should remove some of the hedging demand in gold. The yuan revalue may go slowly and may not even go at all but as long as investor access grows, Chinese coupon receipts will win out over gold storage payments. I expect more news on the Yuan over the next few weeks with the most likely thing being some movement in the daily mid-point. (Update: This has <a href="http://www.reuters.com/article/idUSTRE65L09120100622?type=ousivMolt">now happened</a> while my this post sat in the editor.)<br />
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4) The technical picture and sentiment might make for a swift drop. Gold's recent new highs, signs of <a href="http://globaltrader.blogspot.com/2010/06/weekend-links-australian-commodity.html">increasing retail ownership</a>, and the obviousness of the money-printing-fiscal-debacle discussed above likely have some leaning the wrong way and speculating on price appreciation rather than just hedging. I expect the hedge flows are bigger and will dominate the price direction while speculators add to volatility and chase momentum both ways. The COMEX futures are just above their 20 day exponential moving average as I type and a lower low will occur at 1216. Either of these levels breaking might be enough to cause the momentum to swing bearish in a hurry.<br />
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So to summarise, I see the bullish case for gold but the pressure to use gold as a currency hedge should fall on this Yuan move. Any further price drop might lead to a sharper and longer term fall as weak hands are shaken out and momentum traders change direction.<br />
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A few quick links:<br />
<blockquote>
Australia's ability to service foreign debt more dependent on strong commodity prices than housing. (<a href="http://www.datadiary.com.au/2010/06/11/australia-and-the-credit-squeeze/"><span class="Apple-style-span" style="color: black;">datadiary.com</span></a>)</blockquote>
<blockquote>
The permabears: where are they now? (<a href="http://www.businessweek.com/print/magazine/content/10_25/b4183048417437.htm"><span class="Apple-style-span" style="color: black;">Businessweek.com</span></a>)</blockquote>
<blockquote>
Gold holdings of the GLD exchange traded fund reached a record high. (<a href="http://www.marketwatch.com/story/gold-knows-something-gold-shares-dont-2010-06-07?reflink=MW_news_stmp"><span class="Apple-style-span" style="color: black;">Marketwatch.com</span></a>)</blockquote>
<blockquote>
The Canadian dollar is recovering better than other risk assets. (<a href="http://www.financialpost.com/highest+since+recovery+prospects/3136071/story.html"><span class="Apple-style-span" style="color: black;">financialpost.com</span></a>)</blockquote>
Enjoy the weekend!</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-41100324333865996852010-06-09T00:11:00.002+00:002010-06-09T01:43:11.873+00:00An interesting summary of the May 6th flash crashThis is a very good insiders account of the market microstructure that led to the flash crash and snap rebound. From an interview with Tradeworx CEO, Naraj Narang:<br />
<blockquote>...So, the market was ripe for a catastrophic event, because it was so saturated with stop orders, all it needed was a catalyst. And the catalyst occurred, according to a couple of Reuters reporters, because a large mutual fund complex, decided to do a $4.5B hedging transaction in e-mini futures contracts, which track the S&P 500 index, when the market was already in that vulnerable state. </blockquote><blockquote>Scott: Most of those were actually transacted on the way up. </blockquote><blockquote>Manoj: Right, but the orders were entered prior to the huge collapse, and that’s the important part. On an ordinary day, an order of that size, and that’s a pretty substantially sized order, would definitely have had a ½% or 1% price impact. But on this day, when volatility was already elevated, and the market was just looking for a reason to take profits, it had an outsize effect, and very likely triggered the first wave of stops, which then turned into market orders, which then led to a gigantic spike in volume. What happened then, in relatively short order, was that the Arca exchange (which is owned by NYSE), fell behind, in terms of its ability to process quotes. <a href="http://thewapper.wordpress.com/2010/06/08/testimony-of-a-high-frequency-trader/">Continue reading...</a></blockquote><br />
I found it somewhat stunning and slightly amusing that the events above led to a congressional investigation. Despite all the hand wringing over the "flash crash" it is difficult to view it as more than a distraction for regulators. These are my reasons:<br />
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<ul><li>Its impacts were solely in the secondary market. With every winner producing a loser, it is hard to see any market conspiracy to create such events. The most obvious way this self-corrects is by increasing traders' preference for limit orders over market orders. </li>
<li>While liquidity gaps don't happen often in large liquid markets like the S&P futures, they should not take anyone by surprise. The crash of 1987 is referenced above and is an obvious example. Another more recent example is the gap that occurred in the Japanese Yen in the <s>fall</s> Autumn of 1998 (from 120 down to 112 without trading as I recall) when a large hedge fund asked for a bid to stop out. *</li>
<li>The most pressing problem facing regulators is how to identify and react to market dislocations that accumulate over years. Housing prices, the dot.com boom, the Japanese property and equity bubbles in the 1980s...etc. These market distortions don't focus attention on themselves the way a one day drop does but lead to excess debt and a mis-allocation of resources that reduce growth for years. </li>
</ul><div>*As an aside, it is interesting that the 1987 S&P crash, the Yen gap, and the 2010 flash crash were all driven by unusually large hedging orders. When markets make sharp price moves, traders need to make a snap decision about whether the price move represents a signal or just noise. Usual questions to ask are: 1) How much volume is in the move? 2) Is the seller likely to reverse direction in the near-term? and 3) How many other people are likely to do the same? A massively out-sized hedging order from a large long-term player following a common strategy will always give the impression that the order is a signal. In that instance, men and the machines they build will reach the same conclusion and let prices gap.</div><div class="zemanta-related"><h6 class="zemanta-related-title" style="font-size: 1em; margin: 1em 0 0 0;">Related articles </h6><ul class="zemanta-article-ul"><li class="zemanta-article-ul-li"><a href="http://www.theatlantic.com/magazine/archive/2010/05/monsters-in-the-market/8122/" rel="nofollow">Monsters in the Market</a> (theatlantic.com)</li>
<li class="zemanta-article-ul-li"><a href="http://r.zemanta.com/?u=http%3A//www.nytimes.com/2010/05/15/business/15trader.html%3Fpartner%3Drss%26amp%3Bemc%3Drss&a=18062597&rid=ce488795-e6fd-45a9-bb36-9aeba9b118d4&e=5d87d9ee7c43de998b4d5a7cfbf5d5fc" rel="nofollow">Kansas Mutual Fund Identified as Trader in Market Plunge</a> (nytimes.com)</li>
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<br />
My explanation would be that the market is expecting a restructuring. Restructurings tend to haircut the payments due at all maturities by a similar amount. Thinking in simple terms as if all the debt were zero coupon bullets, a 20% loss on principle expected to be repaid a year from now is more painful than 20% lost on principle due back 10 years from now. <br />
<br />
If investors are beginning to fudge their models to account for principle write-offs they will want to pay lower prices for the short-term debt. Putting these lower prices back into a standard model that still assumes the full principle repayment will show a higher yield to maturity for the short dates. <br />
<br />
In such situations it can be useful to compare the bonds on prices rather than yields. It also makes sense to consider cash neutral hedges rather than duration weighted hedges.<br />
<br />
More evidence that <a href="http://globaltrader.blogspot.com/2010/05/stock-market-stunned-by-its-own.html">I am</a> <a href="http://business.timesonline.co.uk/tol/business/economics/article7140270.ece">not alone</a> in expecting a restructuring. I should add though that the plunge in the Euro this week on news that<a href="http://www.businessinsider.com/heres-the-story-about-german-courts-threatening-to-slap-down-eurotarp-2010-6"> Germany might not be carry out its part in the bailout</a> points to continued belief that creditors will be protected at the expense of the currency.<br />
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<br />
It will be interesting to see how bonds respond today with non-farm payroll numbers typically bringing the volume that allows for big moves. I would expect with momentum weakening in the recent rally and some talking of up to 700k jobs added in May that bonds end the day lower.<br />
<br />
In commodities, it looks like oil is set to regain some of the ground it lost to gold recently.<br />
<div class="zemanta-related"><h6 class="zemanta-related-title" style="font-size: 1em; margin: 1em 0 0 0;">Related articles</h6><ul class="zemanta-article-ul"><li class="zemanta-article-ul-li"><a href="http://globaltrader.blogspot.com/2010/05/technical-analysis-101-adam-and-eve.html" rel="nofollow">Technical Analysis 101: Adam and Eve</a> (globaltrader.blogspot.com)</li>
<li class="zemanta-article-ul-li"><a href="http://www.calculatedriskblog.com/2010/06/employment-report-prediction-bad.html" rel="nofollow">Employment Report Prediction: Bad Reporting!</a> (calculatedriskblog.com)</li>
<li class="zemanta-article-ul-li"><a href="http://ftalphaville.ft.com/blog/2010/06/03/250691/thursday-payrolla/" rel="nofollow">Thursday payrolla</a> (ftalphaville.ft.com)</li>
</ul></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-36334980237792217532010-05-31T09:55:00.000+00:002012-01-27T04:41:01.303+00:00Memorial Day Links: No Bubble in Australian Housing and Greek Problems Continue<div dir="ltr" style="text-align: left;" trbidi="on">
<span class="Apple-style-span" style="line-height: 16px;"><span class="Apple-style-span" style="font-family: inherit;">"</span></span><span class="Apple-style-span" style="line-height: 20px;"><span class="Apple-style-span" style="font-family: inherit;"><span class="Apple-style-span" style="color: black;"><a href="http://christopherjoye.blogspot.com/2010/05/first-signs-of-house-prices-coolingwell.html">The short story</a></span> is that the escalation in housing costs has been mainly motivated by underlying demand- and supply-side fundamentals, not leverage as some doomsayers would have us believe. "</span></span><br />
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: 13px; line-height: 16px;"><br />
</span><br />
<span class="Apple-style-span" style="line-height: 16px;"><span class="Apple-style-span" style="font-family: inherit;">“Could this be the last weekend of the single currency? </span><a href="http://business.timesonline.co.uk/tol/business/economics/article7140270.ece"><span class="Apple-style-span" style="font-family: inherit;">Quite possibly, yes</span></a><span class="Apple-style-span" style="font-family: inherit;">.” (Hat tip </span><a href="http://www.calculatedriskblog.com/2010/05/europe-update_30.html"><span class="Apple-style-span" style="font-family: inherit;">Calculated Risk</span></a><span class="Apple-style-span" style="font-family: inherit;">)</span></span></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-88383885838696612802010-05-30T03:24:00.003+00:002010-05-30T08:28:16.719+00:00Long-term perspective on currencies and central bank policiesI was doing some house cleaning, tagging old entries and came across something <a href="http://globaltrader.blogspot.com/2005/03/my-two-cents-on-currency-debate.html">I wrote in 2005 on central bank policies</a>:<br />
<blockquote>On a related note, foreign CBs will not turn net sellers of dollar assets. They will stop adding to USD reserves which still creates a substantial problem for U.S. interest rates. The markets will continue testing the CBs' appetite for dollars until we see real policy changes and a market determined equilibrium.</blockquote>This referred to the US dollar but the underlying logic still applies to this week's scare regarding China turning seller of Euro assets. China has deep pockets and very little interest in adding to currency instability. The status quo (Yuan pegged at sub-market rates to stimulate Chinese exports) has done well by them and while it <a href="http://mpettis.com/2010/05/don%e2%80%99t-misread-the-trade-implications-of-the-euro-crisis-for-china/">can't go on forever</a> now would be a shockingly poor time for a drastic change. Why would they do this in the midst of <a href="http://globaltrader.blogspot.com/2010/05/are-german-naked-short-and-cds-bans.html">speculative fervor to short the Euro</a> and a general panic regarding European assets? <br />
<br />
My 2005 self went on to make <a href="http://globaltrader.blogspot.com/2005/03/my-two-cents-on-currency-debate.html">the following predictions</a>:<br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, serif; font-size: 13px; line-height: 20px;"></span><br />
<blockquote>There will be some sort of market event with the most likely candidates being housing and interest rates.</blockquote><blockquote>This market event will ultimately require international cooperation (G7, G10). It may take a series of trials (maybe a series of crises) by various CBs and governments but eventually they will need to coordinate policy. The world will need to decide how to handle the issue of the weakening dollar as its main reserve currency.</blockquote><blockquote>On a related note, foreign CBs will not turn net sellers of dollar assets. They will stop adding to USD reserves which still creates a substantial problem for U.S. interest rates. The markets will continue testing the CBs' appetite for dollars until we see real policy changes and a market determined equilibrium.</blockquote><blockquote>Unemployment seems like the best indicator of how hard or soft the landing is in the real economy. Below the June '03 high of 6.3% seems like a good definition of a soft landing for the U.S.[The main question being discussed was whether the US was whether the Fed hiking cycle was leading up to a soft landing.]</blockquote><blockquote>The U.S. current account deficit will get worked off through the growth of emerging market consumption rather than U.S. economic contraction. These emerging economies are the logical target for the world's investment dollars so once the market regains control of capital distribution they should see some benefits.</blockquote>While this was a useful high level map, in the end it mostly helped me to avoid risks. The policy coordination I expected has yet to materialise and instead it is a dog eat dog world of competitive currency devaluations. This makes a fertile (read volatility swings) ground for trading, especially in currencies. I expect this will continue until central bank coordination occurs enabling debt-heavy importing countries to start paying off their creditors.<br />
<div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"><a class="zemanta-pixie-a" href="http://www.zemanta.com/" title="Enhanced by Zemanta"><img alt="Enhanced by Zemanta" class="zemanta-pixie-img" src="http://img.zemanta.com/zemified_e.png?x-id=e3e72485-d116-4e17-a625-cad8191782cb" style="border: none; float: right;" /></a><span class="zem-script more-related pretty-attribution"><script defer="defer" src="http://static.zemanta.com/readside/loader.js" type="text/javascript">
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</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDNTwaautyOYOo4qGoCktkOXfOt2s41h2r4CLWxbQZ6SfhIuwA4ZvHsSvXHXKeRcBzSiBTTYfZqn9wKxYzRQWOx69ZDGik-EztWcOGZluejtnkVNO8fQvHLpFYf8mnGcBMmfKgKg/s1600/SPY+270510" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDNTwaautyOYOo4qGoCktkOXfOt2s41h2r4CLWxbQZ6SfhIuwA4ZvHsSvXHXKeRcBzSiBTTYfZqn9wKxYzRQWOx69ZDGik-EztWcOGZluejtnkVNO8fQvHLpFYf8mnGcBMmfKgKg/s400/SPY+270510" width="400" /></a></div><br />
<br />
The chart for SPY bears a striking resemblance to a <a href="http://trading-strategies.netfirms.com/trading/adameveadam.htm">double bottom pattern</a> with momentum ebbing as the panic low from two weeks back gets retested. Also, as <a href="http://vixandmore.blogspot.com/2010/05/rule-of-16-and-vix-of-40.html">Bill Luby points out</a> options traders seem to be getting ahead of themselves pricing implied volatility trading above what is being observed.<br />
<br />
I am only playing through upstrike call options (where implied vol is less dear), so my downside is limited. <a href="http://globaltrader.blogspot.com/2010/05/stock-market-stunned-by-its-own.html">Momentum players</a> may still have stocks to dump so I have positioned for a bounce but kept the risk low.<br />
<br />
If we do manage a rally here it is easy to imagine the news coverage shifting to discussing the liquidity enema eminating from central banks as equity positive.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-59165642325532571302010-05-19T05:24:00.005+00:002010-05-28T05:44:06.107+00:00Are German naked short and CDS bans really that awful?In response to the <a href="http://www.google.com/hostednews/ap/article/ALeqM5heVIC5SuuY4HOheupzfb9hq2kK3AD9FPH3J00">German bans</a> on some naked short-selling and naked credit default swap (CDS) purchases <a href="http://www.zerohedge.com/article/full-bafin-naked-short-ban-announcement">Zero hedge declares</a>:<br />
<blockquote>If this pans out as expected, look for Bunds to collapse tomorrow, and wipe out a few billion from Pimco's NAV. <span class="Apple-style-span" style="color: black;"><a href="http://www.zerohedge.com/article/morgan-stanley-joins-zero-hedge-calling-future-bund-weakness">We warned in February that the flight to safety in Bunds</a> </span>was both shortsighted, and too good to last.</blockquote>I disagree. Banning naked short selling and unmatched CDS purchases are fairly mundane regulatory changes. Shorting is still allowed as long as the bonds or shares can be borrowed and default swaps are still available but only for hedging purposes. Coming so soon after the bailout announcement, this is being linked to the <a href="http://www.businessweek.com/news/2010-05-09/eu-preps-645-billion-fund-to-fight-wolfpack-debt-crisis.html">"wolf pack" behavior</a> mentioned by officials last week but these policies are in line with <a href="http://www.ft.com/cms/s/0/7b56f5b2-24a3-11df-8be0-00144feab49a.html">reform recommendations</a> from before the Greek crisis made it to the front burner.<br />
<br />
This may be the sort of news that can set off a panic given the view by many that the Europeans are flailing about but I expect the real money will take note of the limited scope and difficult enforcement of today's bans. While I agree that Europe has not yet come to terms with Greece as <a href="http://www.hussmanfunds.com/wmc/wmc100517.htm">a solvency problem rather than a liquidity problem</a>, the current approach is still printing Euros to pay bond holders, so the downward pressure should stay focused firmly on the Euro.<br />
<br />
With the <a href="http://www.google.com.au/search?q=euro+parity&hl=en&safe=off&prmd=nl&source=univ&tbs=nws:1&tbo=u&ei=n3PzS9uXGoLs7AOBobWCDA&sa=X&oi=news_group&ct=title&resnum=1&ved=0CCMQsQQwAA">lopsided view</a> and <a href="http://forexblog.oanda.com/20100517/the-eurs-record-short-position-paints-an-ugly-picture/">large short positions</a> in the Euro currently, I am not even sure the one way trip down there can continue through tomorrow.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-9651825559849082292010-05-08T03:09:00.005+00:002010-05-27T10:24:24.189+00:00Stock market stunned by its own fragility<div class="separator" style="clear: both; text-align: center;"></div><div style="margin-left: 1em; margin-right: 1em;"></div>The price action this week in equities was a change of pace.<br />
<div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div><div class="separator" style="clear: both; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; text-align: center;"><a href="https://images2.optionsxpress.com/dba/VolChrt/365/SPY_365.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="Volatility Chart" border="0" height="240" src="https://images2.optionsxpress.com/dba/VolChrt/365/SPY_365.gif" width="320" /></a></div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">I included the chart above to show just how low the short term volatility of SPY had fallen before the recent pull back. As much as much as the Greek debacle may be the proximate cause of the stock drop, the steady grind higher over the last two months had left the market <a href="http://www.hussmanfunds.com/wmc/wmc100503.htm">ripe for a pull back</a>. The price drop is severe enough that momentum traders will be throwing out positions while value investors will still be on the sidelines for a few hundred more S&P points. </div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">US stocks continued lower on Friday, but the long bond and the Euro changed direction. The long bond has been on a strong two week run up that was goosed higher by yesterday's late afternoon panic, while the Euro had been weakening in response to Europe's sovereign debt woes. Both trends are stretched but seem well supported by the current fundamentals. The reversals in these markets, though mild, makes me think equities will not start next week in free fall.</div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">The Greek saga (which began in early <a href="http://www.smh.com.au/business/world-business/greek-debt-worries-rattle-investors-20091209-khy4.html">December 2009</a>) dominated the headlines with European policy as of last weekend looking to keep the monetary union intact at the cost of a steadily weakening Euro. There is still a lot of skepticism whether the current bailout for Greece is enough and whether the same thing can be done for the other PIIGS but it seems to me that where there's a will there's a way. This is the train of thought that is driving the weakening Euro. It may <a href="http://krugman.blogs.nytimes.com/2010/05/05/greek-end-game/">still happen</a> that Greece abandons the Euro (likely leading to a sharp recovery in the currency) but I think the policy response of last weekend postpones it by a year while the powers that be wait to see if the austerity package works its magic. <br />
<br />
A Greek debt restructuring will also relieve some pressure on the Euro and provide a far better template for the other PIIGS (should their situations worsen) to follow. For all the weekly on again off again bailout announcements regarding Greece it is still <a href="http://macro-man.blogspot.com/2010/05/sea-change.html">not clear the authorities have done their homework and come up with a plan for the Euro and European debt markets</a> that won't need to be reevaluated in the near future. This lack of credible long term goals is the key uncertainty spooking the markets. This thought from <a href="http://globaltrader.blogspot.com/2004/12/public-debt.html">2004 still reflects my view on why attempts to use the bailout package to discipline the Greek government is misguided.</a> </div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Most of the economic news out of the US has been positive, though ignored. It was capped off today by the best <a href="http://www.econbrowser.com/archives/2010/05/nonfarm_payroll_1.html">jobs report in years</a>. The positive recent news is being ignored due to fears of slowing growth in the second half of the year. As the US fiscal package winds down there is no obvious candidate to <a href="http://economistsview.typepad.com/timduy/2010/05/still-unbalanced.html">replace it</a>.<br />
<br />
</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-49334695571106989242010-04-22T03:30:00.002+00:002010-05-28T03:32:27.023+00:00Financial reform moves closer to passingFrom the <a href="http://online.wsj.com/article/SB10001424052748704133804575197962008213550.html?mod=WSJ_hpp_LEFTTopStories">WSJ</a>:<br />
<blockquote>Democrats won the support of a senior Republican who voted in a Senate committee Wednesday for a sweeping overhaul of the market for derivatives, the complex financial instruments at the heart of the financial crisis.</blockquote>With 41 Republican's in the Senate this is a critical achievement for the bill. It will be interesting to see how bank shares react. <a href="http://economistsview.typepad.com/timduy/2010/04/what-could-derail-the-recovery.html">Tim Duy highlights positive developments making the economic recovery looks sustainable</a> but <a href="http://www.fool.com/investing/general/2010/04/20/shiller-the-housing-recovery-could-be-on-shaky-gro.aspx">stock prices</a> and risk assets still appear to be on the high side. <br />
<br />
This is particularly true of bank stocks given the public outrage over the pay structure and conflicts of interest. Reducing systemic leverage is another likely regulatory theme. Regulatory uncertainty along with <a href="http://www.hussmanfunds.com/wmc/wmc100412.htm">lingering insolvency fears</a> make it difficult to understand how owning bank shares makes sense to anyone here. My personal view is that bank shares are in for a lost decade as deleveraging and capacity reduction work through the sector. We shall see.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-6285509077154483342010-04-19T02:51:00.002+00:002010-06-02T04:48:03.957+00:00Link summary from my other blogI had begun a <a href="http://globaltradersdiary.blogspot.com/">new blog</a> a few weeks ago while Globaltrader.blogspot.com was still unavailable for posting. I plan to continue posting only on this blog now that it is restored but if it is removed by Google again I will return to that one.<br />
<br />
Posts over the last few weeks had been:<br />
<br />
<ul><li>A look at some of the <a href="http://globaltradersdiary.blogspot.com/2010/03/systems-approach-to-global-financial.html">causes of the financial crisis and some thoughts on where the new regulations should focus</a>. This <a href="http://ineteconomics.org/sites/inet.civicactions.net/files/INET%20Turner%20%20Cambridge%2020100409.pdf">speech</a> noted recently by <a href="http://economistsview.typepad.com/economistsview/2010/04/adair-turner-of-financial-regulation.html">Mark Thoma</a> is also a good summary. It is a bit odd that the <a href="http://feedproxy.google.com/~r/CalculatedRisk/~3/u5EI6G0bfy8/ryan-avent-on-minsky-conference-and.html">US regulators still do not seem to acknowledge their role in the crisis</a>. </li>
<li><a href="http://globaltradersdiary.blogspot.com/2010/03/chinas-will-revalue-renminbi-in-q4.html">China's position on the yuan</a>. The story is changing a bit with China's economy apparently <a href="http://online.wsj.com/article/SB10001424052702303531304575177103339227506.html?mod=WSJ_hpp_LEFTWhatsNewsCollection">shifting to domestic consumption</a> without any currency adjustment but my conclusion is still the same.</li>
<li><a href="http://globaltradersdiary.blogspot.com/2010/03/summing-up-week.html">A news summary for the last full week in March</a>. </li>
<li>Another summary <a href="http://globaltradersdiary.blogspot.com/2010/04/mortgage-delinquencies-continue-rising.html">focusing on mortgage delinquencies</a>. The note on yields possibly reaching a peak still holds with bonds trading strong last week and likely to benefit from continued Goldman / financial regulation fall out in equities.</li>
<li>I celebrated the reappearance of Global Trader's Diary by looking up <a href="http://globaltradersdiary.blogspot.com/2010/04/reliving-history.html">an old discussion on Fed policy and whether it was leading to distortions in the markets and underlying economy</a>. While not exactly predicting the crisis, it was fair to say many people saw the highly leveraged environment as ripe for catastrophe. Naming GM, AIG, and FNM in <a href="http://globaltrader.blogspot.com/2005/04/judging-fed-policy.html">2005</a> as trouble spots, was a reflection of consensus among financial professionals and not due to any personal insight. How were these problems allowed to fester until 2008? I would give myself poor marks in estimating the timing of debt problems but I think the Fed failed in its dual mandate to maintain maximum employment. A less leveraged economy in 2005 would almost certainly have led to an earlier adjustment of US saving rates and consumption patterns leading to a smaller shock to employment.</li>
<li>Another <a href="http://globaltradersdiary.blogspot.com/2010/04/more-on-mortgage-delinquencies.html">update on mortgage delinquencies as Equifax data contradicted</a> the <a href="http://globaltradersdiary.blogspot.com/2010/04/mortgage-delinquencies-continue-rising.html">city by city delinquency rates from CoreLogic</a>. </li>
</ul><div><br />
</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-8046805899770032862010-04-10T03:27:00.001+00:002010-04-10T04:27:08.259+00:00Are there scale economies in banking?Mark Thoma concludes his <a href="http://economistsview.typepad.com/economistsview/2010/04/breaking-up-big-banks-as-usual-benefits-come-with-a-side-of-costs.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+EconomistsView+(Economist's+View+(EconomistsView))&utm_content=Google+Reader">summary on whether scale economies in banking</a> justify the existence and benefit of large banks with the following:<br />
<br />
<blockquote>I'd like to know the source of the scale economies. The paper linked above estimates returns to scale, but not their source. As noted in the introduction (and also noted by <a href="http://macroblog.typepad.com/macroblog/2010/04/breaking-up-big-banks-as-usual-benefits-come-with-a-side-of-costs.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+typepad/RUQt+(macroblog)">David</a>):<br />
<blockquote>Our results indicate that as recently as 2006 banks faced increasing returns to scale, suggesting that scale economies are a plausible (though not necessarily only) reason for the growth in bank size...</blockquote>Without knowing the source of the changes in costs as banks increase in size, the (non-parametric) results -- results that differ from most previous work -- are hard to evaluate. I've been hoping for good estimates of the size and nature of the economies of scale for banks, but I'm not fully convinced by this evidence.<br />
<br />
</blockquote>Mark is correct to try to figure out the specifics that are driving the returns in the study. From my own experience - sales and trading in loans, bonds, and commodities - scale is found mostly through network effects. The market players that have the most trading flow and transactional experience in a particular market have the accurate prices and up to date information. This advantage leads to a higher return by being more likely to earn the bid / offer spread when making markets and being able to price services at a premium with clients wanting information access as well. While this can be a stable and profitable advantage it was a small part of the profit in the banking areas I have worked in.<br />
<br />
I would expect other economies of scale on the deposit taking side of the business as servicing a large number of depositors in a centralised fashion seems like a classic scale business. The number of clients and transactions adds little marginal cost while the licensing, reputation, and infrastructure represent substantial fixed costs. This advantage is hived off from the risk taking and higher margin bank businesses with the internal treasury and risk department charging LIBOR plus a spread for use of funds. These risky parts of the business still tend to grow fairly large despite the absence of scale economies. I attribute this to the money politics of the industry as empires grow and shrink based on raw profit. Growth is revenue rather than cost driven. This fits well with the ease that hedge funds have found competing against banks in sales and trading functions though funds usually start with few people and no scale.<br />
<br />
Another thought that I had <a href="http://macroblog.typepad.com/macroblog/2010/04/breaking-up-big-banks-as-usual-benefits-come-with-a-side-of-costs.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+typepad/RUQt+(macroblog)">from reading David's post</a>, was that even if there are economies of scale that does not justify "too big to fail". It shows that big can be a public benefit but if that is the case then a system needs to be created so that the naturally big entities created can be wound down effectively if necessary. I believe this is now widely accepted following the difficult ad hoc responses that became necessary for troubled large institutions in 2008.<br />
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Particular banking businesses may need to be large to get the maximum public benefit but for the reasons above I doubt this applies to the financial industry as a whole. Careful thought should be given so that if a safety net for large institution needs to be maintained it only applies to functions that can justify scale benefits. If scale can be justified it still does not justify the lack of a mechanism to wind down large institutions when necessary.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-1165589438094942452006-12-08T14:35:00.001+00:002010-05-27T10:23:27.571+00:00Dollar Remains Unimpressed by U.S. Payroll reportFrom <a href="http://www.briefing.com/Investor/Public/MarketAnalysis/BondMarketUpdate.htm">Briefing.com:</a><br />
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<div class="marketUpdateStory"><span class="st-Time"></span><br />
<blockquote><span class="st-Time">09:25 ET </span><span class="storyTitle"><b>10-Yr: </b>-01+/32..4.487%.. <b>GNMAs: </b>+01/32.. <b>USD/JPY: </b>115.0500.. <b>EUR/USD: </b>1.3339</span><br />
<blockquote><strong>The Rally That Wasn't:</strong> The buck was given a strong boost over & through recent resistance zones on the majors following the data but that boost fizzled quickly. The brief rally was aggresively sold into sending the dollar well lower. The euro went from 1.3276 to 1.3237 to 1.3344 in the span of about 20 minutes. The dollar index, for all its 47 point range post-data is now sitting around where it closed yesterday at 82.72 (-0.04). Negative sentiment on the dollar was clearly unaffected by the jobs report.</blockquote></blockquote><blockquote></blockquote></div>Nothing about that report looked bad for the dollar as the initial bond reaction showed. Not sure how else to interpret the action other than sellers using the liquidity around the news to get out of more dollars.<br />
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In other dollar watching news <a href="http://www.rgemonitor.com/blog/setser/162054">Brad Setser points out</a> ICBC's interest to <a href="http://www.forbes.com/business/feeds/afx/2006/12/06/afx3234599.html">repatriate $16 bn generated by its IPO</a>. Guess the PBoC will just step up and buy them but I wonder if their will be some political chatter about the request.<br />
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<span style="font-weight: bold;">Update 3:50 PM: </span><br />
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From the <a href="http://www.ft.com/cms/s/887db51c-86a6-11db-9ad5-0000779e2340.html">FT</a>: <br />
<blockquote>“The market was looking for the next trigger to sell the dollar, rather than buy it,” said Tania Kotsos, strategist at RBC Capital Markets.</blockquote>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-8748889.post-1165356399037078822006-12-05T21:57:00.000+00:002006-12-05T22:10:04.220+00:00We need more power!<div class="p"><b>From the <a href="http://www.marketwatch.com/news/story/citigroup-hires-executive-build-europe/story.aspx?guid=%7BA55D20BF-8D5D-44CA-BF98-8FBF296E8C22%7D">Marketwatch</a>:<br /><br /></b></div><blockquote><div class="p"><b>LONDON (MarketWatch) -- Citigroup Inc. (C) investment bank Tuesday said it has recruited Paul Mead, the current director of continental European power and gas trading at Barclays PLC (BCS), to develop its own European power and gas trading division.<br /><br /></b></div> <div class="p"> Citigroup expects to hire 20-30 traders as well as a back office team to start trading continental European power and gas, a spokesman for the company said. </div> <div class="p"> The division will be based in London and is expected to start trading in the second quarter of 2007.<br /><br /> </div> <div class="p"> Mead, 38, will take up his new position in March. Mead is a well-known figure in power trading, having joined Barclays in 2002 to set up and run the bank's Continental power trading operation. Prior to Barclays, he spent six years working a Enron Europe, a now defunct unit of bankrupt energy firm Enron (ENE).<br /><br /></div> <div class="p"> Aside from gas and power trading, the bank is also considering trading European carbon dioxide allowances, the spokesman said. He added that no specific date has been set for adding the CO2 allowances to its product portfolio list. He also wasn't able to comment on which specific European countries Citigroup plans to trade gas and power.<br /><br /></div> <div class="p"> Citigroup already trades oil, gas and power from Houston, Texas and gas from Calgary, Canada.<br /><br /> </div> <div class="p"> Mead will report to Stuart Saley, Global Head of Power and Gas, and in London, Mark Watson, head of fixed income.</div></blockquote><div class="p"> </div>Yes, its slightly boring but I am trying to jump start my blogging mojo. Been wondering a lot lately about whether all the money <a href="http://www.climatechangecapital.com/WorkArea/linkit.aspx?LinkIdentifier=id&ItemID=249">flying into carbon</a> can really be profitable and what sort of political will and understanding there really is to carry through creating a market worth playing in. Especially with the truely interesting debate going on about <a href="http://www.google.co.uk/blogsearch?hl=en&ie=UTF-8&q=discount+rate+generation&btnG=Search+Blogs">the value of starting now.</a><br /><br />P.S. I widened my page first <a href="http://bigpicture.typepad.com/comments/2006/12/about_these_cha.html">Barry</a>.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-1156773584042368782006-08-28T13:52:00.000+00:002010-05-28T03:36:31.908+00:00Eliminating Volatility from Inflation MeasuresThe <a href="http://www.ft.com/cms/s/6670cfea-35f2-11db-b249-0000779e2340.html">FT covers </a>statement's by the BoE's chief economist, Charles Bean, that the U.S. should not strip out food and energy from the inflation measure used to set policy:<br /><blockquote><p>The US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices, Charles Bean, chief economist at the Bank of England, has suggested. It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 per cent, against 2.7 per cent for core inflation.<br /><br />Mr Bean told the Fed's annual Jackson Hole symposium at the weekend that energy prices were rising for the same reason the price of many manufactured goods were falling: the rise of China and other emerging market economies. Since both price trends had a common cause, he said it makes little sense to focus "on measures of core inflation that strip out energy prices while not stripping out falling goods prices as well."</p></blockquote>This debate gets brought up a lot by inflation hawks but I like his reasoning about China being the driver on both fronts. Also I was struck by the idea that while the U.S. eliminates food and energy from the top line to reduce volatility in the data, U.S. overnight rates have been quite volatile.<br /><br />I guess this stuff is neither here nor there since the data including food and energy is still available and the bond market approves of the FOMC's view by keeping the inflation outlook low.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-8748889.post-1127492706496246472005-09-23T16:30:00.001+00:002010-05-27T13:15:30.672+00:00Renminbi: Less Currency Basket More Dollar PegFrom <a href="http://www.bloomberg.com/news/markets/currencies.html">Bloomberg</a>:<br />
<span class="style5"></span><br />
<span class="style5"><blockquote>China's central bank said today it will allow the yuan to strengthen by as much as 3 percent from a daily fixed rate against the euro, from 1.5 percent previously. It kept the range against the dollar unchanged. The 12-nation currency is also being hurt by expectations the interest-rate advantage of U.S. government debt over European bonds will widen.</blockquote></span><a href="http://macroblog.typepad.com/macroblog/2005/09/the_chinese_cen.html">Macroblog </a>has more on the news but <a href="http://www.rgemonitor.com/blog/setser/97860">Brad Setser had something a few weeks</a> back that telegraphed this pretty well. To me this news means China is not giving up on the dollar peg anytime soon. More important than my interpretation is what the U.S. congress makes of it. A lot on their plates now but protectionism was certainly more popular before China announced its currency basket. Probably bad for stocks if that sentiment returns.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-8748889.post-1126728451573969812005-09-14T20:00:00.000+00:002010-05-28T05:44:26.218+00:00UK Property Derivatives MarketFrom the <a href="http://news.ft.com/cms/s/dc745efa-254f-11da-98dc-00000e2511c8,_i_rssPage=350b0bf6-cbf0-11d7-81c6-0820abe49a01.html">FT</a>:<br /><blockquote>Major players in the financial services industry are to partake in a trading game in property derivatives starting next month in a drive to accelerate the development of the market in the UK.<p id="U1202237607087WcC">The initiative, which is being spearheaded by Hermes, the investment fund, is intended to give investors, property companies and investment banks the chance to gain practical experience in trading derivatives in a realistic environment – but on a virtual basis. The exercise is also aimed at gauging the level of potential demand.</p><p id="U1202237607087k2H">Derivatives are financial instruments that effectively allow investors to bet on the direction of a particular market. A property derivative would give investors and companies exposure to the sector without having to own bricks and mortar. Buying derivatives is also often quicker and easier than physical property transactions.</p></blockquote><p id="U1202237607087k2H"></p> Now that is interesting. I have believed for a very long time that with the massive amounts of wealth tied up in real estate and the normal concentration of risk by geography that a derivatives market was overdue in the sector. I am not familiar with the particulars of the contracts but it will be interesting to see how increased derivatives trading will impact the underlying market.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8748889.post-1126272402115161512005-09-09T13:30:00.000+00:002010-05-28T05:46:59.332+00:00The Refinery Side of the EquationFrom the <a href="http://news.ft.com/cms/s/166245fe-210f-11da-a603-00000e2511c8.html">FT</a>:<br /><br /><blockquote><p>Assessing the impact of the storm that closed refineries in the US's most important oil producing region, Europe's second largest oil group said it expected production in the region to reach only 60 per cent of the pre-hurricane levels by the end of the year. </p><p>It added that refineries at some sites including Mars, one of the gulf's largest deep water platforms capable of producing 220,000 barrels a day, were unlikely to resume activities this year.</p><p>The region, which produced an average 450,000 barrels of oil equivalent per day or about 15 per cent of group production in the first half of the year, is now only producing 160,00 boe/d following the damage caused by the storms.</p></blockquote>This is the flipside of the story from last night.<br /><br />Update: I may have confused some details and I kind of wonder if the author of the story did as well. Despite all the references to refineries and refining capacity near the top, the story closes with this:<br /><blockquote><p>In addition, Shell said a third of its refining capacity in the US had been knocked out by Hurricane Katrina. Before the storm Shell refined a million barrels of oil a day at its seven refineries in the US. Two of these sites - Motiva Convent and Motiva Norco had been affected but were expected to return to pre-hurricane levels by the middle of next week.</p></blockquote>At this point I am guessing this last section is the only portion dealing with refining and that the deep water platform, Mars, is mistakenly referred to as a refinery.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-8748889.post-1126224029903328962005-09-09T00:00:00.001+00:002010-05-28T05:46:59.333+00:00Watching Oil vs. Gasoline SpreadFrom the <a href="http://news.ft.com/cms/s/3a9a2dfe-209e-11da-81ef-00000e2511c8,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html">FT</a>:<br />
<blockquote>The US and Europe are releasing more emergency crude oil than refineries in the Gulf of Mexico can handle, reinforcing suspicions that governments are using the crisis triggered by Hurricane Katrina to cap record oil prices. <br />
Data from US oil inventories released on Thursday showed that crude oil stocks had fallen by 6.45m barrels, well below the 13.6m barrels of oil production that by Wednesday had been lost as a result of the hurricane.</blockquote>This has been pretty well telegraphed with most people being very aware that the hurricane had a bigger impact on refining capacity than oil production. Prior to the hurricane refineries were already being talked about as a bottleneck. <br />
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It could still make an interesting situation though as a trader could have been very right and foreseen an inflation spike but still end up being positioned exactly wrong as oil (which has been leading the commodity charge) goes the other way. I don't know the commodity market as well as the credit market but the situation is a bit similar to the <a href="http://globaltrader.blogspot.com/2005/05/gm-aftershocks.html">wishbone </a>in the automotive sector when the credit downgrade came on the heels of Kerkorian's GM tender. <br />
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I haven't been blogging much lately as my views haven't changed very much since early Summer. The continued strength in the equity markets has been at odds with the problems I see so I have done very little. Prior to Katrina I thought the housing market was finally losing steam and leaving little cause for inflation. That is no longer the case as the refining and general transport issues caused by the storm are unknowable at this point. <br />
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Got to be one of the more interesting Fed meetings approaching. I lean towards a hike at this meeting.Unknownnoreply@blogger.com0