Wednesday, April 22, 2015

FIRE !!!! (J.K.....)

Guy walks in to the shadows of a crowded movie theatre. Yells "FIRE!!!!!". People scramble to exit. Some get trampled and hurt. It's ugly.  A few skeptics remain (for the movie's still running).  Of course, there's no fire. But people are prudently herd-oriented by nature so react viscerally.  The guy emerges from the shadows, and coolly takes a prime seat - perhaps his objective all along?  Some return to recoup their sunk cost, discover the predictable ending, or just watch Clooney, Pitt et. al. remove his shirt one more time. Sure, the guy runs the risk that he will be discovered as the causation of the chaos and mayhem. Sure, one of the larger and more muscular of the "victims" might punch him in the nose or break his leg(s). Or theatre management, might call the police, whether for civic purpose or liability containment. Others have employed the ruse successfully to obtain prime seats, with similar consequence. And despite its occasional reporting in the press, patrons, out of self-preservation, still react with the same visceral flight response. Sometimes they act in concert as two FIRE!!-Criers!! are more credible than one.  

But somehow, in electronic financial markets, such ruses, ploys, and games, are discounted by apologists - be they HiFTers, libertarians  (despite prevailing laws and regulations) and the recent arrest of the alleged perp accused of initiating the cascade. Why should one think it decidedly unacceptable in civic life, but somehow victimless, harmless and tolerable in financial markets?  I think there is some hypocrisy about.The beauty of electronic exchanges is that there is there is a record and audit trail that easily permits measurement and enforcement of acceptable behaviour as defined by the rules. Egregious behaviour (spoofing, layering, etc) should be glaringly apparent and is easily discoverable by the even the most amateur of data tinkerers. Canadian SEDAR requires blue-sky disclosure of MF time and sales (something the US should emulate for MFs and HFs). The failure of exchanges themselves to investigate and exorcise the demons (or facilitate availability of the entire package of participant-specific quote-level data to all investigators) leads one to imagine that commercial conflicts are rife (as if we needed further evidence. 

That exchanges themselves, and industry organizations have ignored/are ignoring this is perhaps not surprising. However the most striking [risk-management] issue - whether at the exchange, clearing-house, or executing broker or clearing broker level is the apparent total untethering of what a modestly-capitalised west-london punter can firmly enter and display on one of the most visible and largest exchanges in the world from the resources of that same modestly-capitalized punter can muster to make good the entry of orders for purchase, or sale of the leveraged positions, let alone the underlying magnitude of these positions. One wonders whether markets would have been similarly effected if participant-level disclosure indicating that  Navinder Singh Sarao's modest account was touting these bids/offers or merely some indicator that the posted buyer/seller had no chance of fulfilling commitments.




Tuesday, March 24, 2015

Yellen Isn't Yellin' Anymore

During times of liquidation, panic, and revulsion, when authorities are trying to establish a definitive floor under asset prices, and create an atmosphere of greater confidence in order to assuage fears and encourage longer-term capital investment, there is reasonable benefit clearly telegraphing policy intentions. Speculators may (and probably will) use this elevated level of certainty to front-run actual "real" flows. And this is fine and good since desired policy outcomes (at such times) tangibly benefit from the reduction and/or elimination of speculative short positions (or at the very least refraining from disinvestment or erstwhile liquidation). Policy objectives, are further hastened by speculative flows, at least initially, whether by confidence-bolstering or behavioral feedback effects.  While the promise of backstopping is real, the primary effect results from old-fashioned "jawboning" to harness otherwise pro-cyclical flows to stabilizing, counter-cycling effect. At such times, it likely that just credibly stating that one will pursue certain stated policy(s) with defined objectives is often more efficacious than the implementation of the policy itself - the operative word being "credibly".

There comes the point in the inevitably-cyclical process - recent context being QE2 or QE3 or the present (choose your poison) - where fear of the abyss has passed, and when prevailing policy's "certainty", is extrapolated and viewed as providing perennial and asymmetrical risk-reward, or a proverbial "free lunch", irrespective of the extraordinary conditions for which it was originally conjured, and its decidedly-temporary nature when seen in an historical context. This is the moral hazard that policy certainty can wreak in general, and what disturbs me about ZIRP/QE in particular. The macroeconomy, in its aggregate investment decisions, typically overshoots sufficiently well without the further help of leveraged, speculative flows. There is little to done about The People making overenthusiastic coincidental investment and consumption decisions on the basis of the recent past, outside the modulation of traditional fiscal and monetary policy. This IS the business cycle.

Given the size of the financial economy in general, the increasing size of trading-oriented, leveraged investments, and feedback-related trading and risk-management styles, and the general hordes within the momentum-driven electronic herd, much of which is focused upon, and driven-by observing rather arcane nuances in policy, central-bankers in particular should, rightfully, be mindful of aligning the aggregate animal spirits in the general economy with leveraged financial speculation attempting to game perceived policy certainty.  In short, in order to deter leveraged speculative activity at such times, when it is, as Rumsfeld might have termed, "decidedly unhelpful", i.e being pro-cyclical well-after the sell-by date of its usefulness, markets periodically NEED to be spanked. They NEED to understand that policy should, and will be, data-dependant. That might include whipsaw moves in rates and prevailing policies, even if sub-optimal with perfect hindsight. They [markets] need to understand there is no certainty, and no free lunch. And as more and more investment becomes rote, algorithmic, and systematic, these models (and their programmers), too must incorporate uncertainty at levels that incorporate longer-frame regimes than many systematic macro and risk-parity strategies contemplate or integrate, or other endeavors that overweight recent regimes at the expense of the more-distant-but-not-wholly-irrelevant past, or the next. Should one doubt the benefits of such an uncertainty principle,  simply imagine the wild rumpus that would ensue following universal pursuit of the free lunch. Some would argue we're already there (though I am not so stridently convinced despite sympathetic caution).  

Pulling away the milk-teat is never easy. Markets will need to get used to a return to policy uncertainty. There is significant momentum in the real economy, and it is likely it will not be derailed by a bias towards higher rates, or marginally-increased financial market volatility. We should not shed a tear for those Icarii who get run over by it's process.  I've no problem with the authorities acting as "Lender of Last Resort", or the idea of their provision of liquidity as systemic backstop. But precisely "where", and "at what cost" should remain ambiguous to prevent the cleverly rapacious psychopaths amongst us from [trying to] test their boundaries and aggressively game it. In this regard, the fact that Yellen isn't yelling [specific certain forward policy guidance] anymore is highly appropriate.  Get used to it. Embrace it. And remain mindful of charlatans with strategies overly-dependent upon mindless extrapolation and leverage.

Thursday, March 12, 2015

That FANUC Reply to ThirdPoint (in full)

Giving is Easy - Taking is Hard

Despite the occasional satirical joke, I've never had a grave problem with QE. Like many other sober-minded observers, QE, seen in its temporal context, was one of the few available weapons to put a floor under floor asset prices, finance the large counter-cyclical deficits thus preventing the worst of a delveraging-induced revulsion and associated dislocations of unemployment and output gaps, in an otherwise spartan policy armory. The limited policy options were partly due to rates' proximity to the ZLB, partly because of the difficulty in building consensual responses in an acrimoniously-divided polity and, yes, partly because of the moral furore surround culpability four the crisis.

Though my concerns about tin-foil hat hyper-inflationary fears were near-zero, so too were my expectations that QE would be a panacea. QE, was, never going to be a cure-all, but was decidedly positive whatever critics may say - if only for psychological, confidence-boosting affirmation that the authorities would not stand idly by, holding their willies, passively witnessing a liquidationist resolution, however-much Austrian School proponents were hankering for one.

With memories of Japanese premature fiscal withdrawal still fresh, I believe history will see QE2 as a useful example of trying to avoid past policy mistakes, by making sure foundations of recovery were sufficiently strong before modulating countermeasures. In isolation, it will not be judged harshly. QE3, from the start, was seen by many, as more contentious, and I also agree with their reservations. Growth IMO was sufficiently on its way, and would, (again IMO), have continued similarly without further asset purchases. However, seen in the context of Euro jitters, the silly sequester battles, Arab Spring upheavals, QE3 should also be seen as the Fed's attempt to prevent large political uncertainties from systematically undoing the meaningful progress. And while I was, and am, concerned about the embedding of Pavlovian behavior, I believe there was (at least some) merit in their response and we should accordingly throttle our harshest judgements. The alternative outcome will remain hypothetical, but the actual result of continued growth, faster-than-expected fiscal consolidation, straight-line drop in unemployment and emergence of real wage growth is hardly worthy of too-severe recrimination.

Maybe one-day, social scientists will accurately factor-analyze the transmission mechanism. Was it the QE-induced, low rates themselves? the psychological boost of asymmetrical forward-looking asset-price expectations given a newly-communicated floor?; the asset price market values, capital gains and their multipliers resulting from QE?; the multiplier effects of seamlessly funding counter-cyclical government expenditure - both automatic stabilizers and pro-active stimulus?; or was it just the generalized normalization of economic activity by removing fear of A Great Depression and feared Zerohedge-like survivalist dystopia? I invite readers to offer their attributions of choice and associated weight of contribution.

Whatever one's attribution, no one can ignore the obvious cumulative result of QE and its interactions: asset prices far and wide have soared as a result of the policy, creating unimaginably-large "windfalls" to asset-owners through little cause of their own. Attempts should have been to "sterilize" at least a portion of windfalls - through targeted fiscal policy - partly for reasons of fairness and equity, and partly to deter the systemic gaming in speculative leveraged bets upon one-way economic and financial policy.

How quickly investors forget. If you'd asked large asset owners in late 2008, or early 2009: "Would you give up a tranche of the future capital gains in asset prices in exchange for a floor under prevailing prices, and the near-assuredness of significantly higher asset prices in the future?", I am quite sure of the answer, given the widespread systemic fears and paucity of alternatives at the time. Investors, after all, pay 2&20 to HFs and PE for essentially the same (pre-tax) premise. Was not QE effectively the same proposition multiplied across the entire economy? The liquidationist alternative was clearly unpalatable to asset owners, and sub-optimal for nearly everyone else. IF, as the result of a policy directive, you bestow large windfall gains, it would be only fair to harvest a an additional share of those for the Public's Interest, since the goal of QE policy was NOT to further stoke inequality, nor accelerate the growth of fortunes for existing asset owners, but rather to prevent unnecessary liquidation, and deflation so private-sector balance sheet deleveraging could work its course, and to foster stability, so reviving private investment decisions in the real economy. But, as it happens, giving is far easier than taking away - irrespective if you're a welfare deadbeat (not my language) or a leveraged rentier.

Pundits and critics from the right rarely miss an opportunity to point out the inherent difficulty of unwinding government programs and bureaucracy. It is a criticism worth noting. For bureaucracies and organizations often assume lives of their own and wills to survive long-beyond the sell-by date of the problem or policy purpose, defending their mission and rights to exist with intensity and vigor. Once laws are enacted and forces mobilized, introspection is a novelty.

Yet, the same pundits and critics refrain from similarly-inspired criticisms when it comes to the beneficiaries of QE, and the protection of their windfalls. It is baffling. The right, politically, hates QE, and all that it stands for, but surely all of Jim Bunning's or Rand Paul's tirades would have been put to better use to promote some sterilization policy that would ameliorate the less-desirable side-effects, efforts that would not damage their populist dogma (excepting perhaps their relationship with Grover Norqvist)

Asset owners peculiarly act as if such windfalls somehow resulted from their own brilliance. Many, through every over-leveraged fault of their own, were a pubic-hair's breadth away from financial obliteration, saved by US - and I don't mean the United States, but rather you, and I, as representations of the taxpayer, or bag-holder as the ultimate underwriter of newly issued debt. Others - particularly in the tech world and on the left coast - are blind to the benefits wrought by munificence of The People, and the abundant liquidity finding its way into every inane crevice, and spilling over to provide VC's and PE investors exits at multiples unimagined even three years ago. And the "thanks" that all those west-coast libertarians afflicted with self-attribution bias, is to piss on the under-class who serve them, and wish for a Randian offshore tax-haven to insure they share as little as possible with the undeserving multitudes. These gripes are academic, but asset-owners would do well to reflect upon their self-attribution bias.

As a markets person, my concerns with QE (particularly QE3) remain consistent with concerns expressed in the past at one-way CB interventions. That is to say, it likely creates a moral hazard whereby financial institutions and speculators lean on the policy backstop to front-run, lever-up (be it risk-parity; duration, credit), in ways that ultimately create more systemic risk, volatility, sowing the seeds for future dislocation, and likely requirement for public market stabilization [again]. Such hazard is amplified by lack of sterilization. I admit I don't know precisely how it might be implemented, or the optimal boundaries or details, just that fiscal policy deterrents would help diminish some of the negatives to society of one-way unsterilized monetary policy largesse gifted to large asset owners caught in the happenstance of monetary policy.

Friday, January 23, 2015

"Pulling Out All The Stops"

Journos, observers, commentators, bloggers, traders, analysts, strategies, newscasters, reporters, and so it seems just about everyone else has a view on QE. And the result is overwhelmingly INTENSE. They've PULLED OUT ALL THE STOPS!!!!. No, not the ECB. I mean, anyone writing about the ECB's announced policy actions.

Below is an exhaustive (hyperbole?)list of the terms and associated language casually garnered from almost all the QE headlines and articles over the past few days. One could of course forgive any single instance of excitement, but in surveying the landscape, it's clear something's in the water. Especially in the United Kingdom (the nation with the highest and most pernicious sustained primary deficit, and a grand-canyon-sized CA gap - NB: intentionally exaggerated language) which is the source of most hyper-ventilative language (yes you guessed the Telegraph & Ambrose E.P. wins again). Even the usually-dry FT leapt on the bandwagon (sorry - OTT metaphoring is infectious), and sober BBC "joined the party" (drats!I did it again). Just have a look....

unleashes
triggers
pushes-the-button on
massive
massive
boost
huge
massive
injects
launches
pump
pull-trigger
bang
financial bazooka
d-day
salvo
unfettered
full-fledged
shock & awe
full-scale
massive
scheme
finally
long-awaited
fatally
exhausted
deflation
rescue
revive
save
struggling
back-door
plummeting
deep-division
severe reservations
wary
slide
teetering
brink
downward-spiral
reluctance
damage
faulty
disappoint
fatally-weaken
unimpressed
questions
flawed
lambast
stagnation
underwhelmed
wrong type
tensions simmer
inevitably fail
deservedly fail
last throw of the dice
too-small-too-late
won't save
will not solve
unclear
diminished
uncertainty
dangerously-close
save-from-ruin



Poor Draghi must feel like he's been gang-raped. OK, so it's "momentous", unprecedented" blah blah blah. Really? Euro 1 trillion (including existing programs) over the course of a year across an economy sporting GDP > EUR14 Trillion; Net Assets> (I've no clue but'll stake a stab...EUR 70 Trillion??)....hardly worth losing one's integrity over, considering all the program's practical limitations. As it happens, the Irish, and foreign obserservers writing in ENglish (India, Japan) were the most measured and least hyperbolic, using neutral language and refraining from the gratuitous ummm errr gratuitousness with words tethered to reality like.

start
begin
announced
revive
stimulate
program


Yes, the latter list is short...

Friday, January 16, 2015

A Recursive Crisis of Faith in My Chosen Lack of Faith

Idiocy.
Hypocrisy.
Uncountable belief paradoxes, logical flaws and non-sequitirs.
Demagoguery.
Magical thinking.
Legitimacy of dubious Profits.

One would be forgiven if one's first thoughts turned to the financial industry. Rather, as a sympathetic [amateur] satirist, I am of course referring to religion.

Such is my dismay at the actions of people claiming to speak, and act in the name of God - emphasising that this net is cast wider than Charlie Hedbo's assasins - I am beginning to seriously question my own faith in my chosen lack of faith - The Church of the Apathetic Agnostic. CAA's basic creed is simple: there is little point to arguing about something that neither can be proved nor disproved, though, even if a Supreme Being exists, he/she/it displays little concern for the affairs of humanity, so it's only sensible to requite with similar apathy. However, when the faithful project their inner beliefs outwardly, in a manifestly violent manner, I begin to wonder whether we need to respond with more serious weapons. Dawkins? Perhaps. But hardly as potent as...

Thursday, November 13, 2014

The Truth Hurts

Yes, I admit that I am surprised, that The People are surprised, that Bank FX Desks routinely (and I emphasize 'routinely') predated customer orders. This is, judging by the long list of things diddled when People have the opportunity(s) and incentive(s) do do so, Standard Operating Procedure, endemic not just to Banks, but, more or less, I am sad to say, most of the human enterprise. Banks undoubtedly are eyebrow-raising, less for their routine seeking of advantage at others' expense (let's term this 'business'), but rather for the breadth and magnitude of their repeated gluttony in a profession where trust is, I daresay, rather crucial to the entire undertaking.

Yet, what I, personally, find most surprising about The Banks, and the cast of characters who run, and inhabit them, is that they are incredulous, and somewhat mystified, to the suggestion that people really do hate them. Take the case of one of the largest American money-center banks where an uncle of mine was engaged to help them understand how to exploit opportunities on their newly-embarked-upon course of "Bancassurance". Specifically, he was asked by their Board to help them understand how to cross-sell insurance services from their newly-acquired insurance arm, into their existing customer base. My uncle, being a pioneer in focus groups, and brand-extension, did what he does best: conductive exhaustive focus-group study of the issue and analysis before presenting his findings to the Board. His results were categorical. He told them, in no uncertain terms, they had almost no chance of selling their subsidiary's insurance to their existing customers. "On what basis?" they asked rather angrily. He said it was obvious: all his research showed that people HATE their bank. It almost didn't matter which one. Most people think the other banks are better than their own, so you actually have a far better chance of selling their subsidiary's insurance to anyone BUT their customers. Awkward silence ensued. Meeting was quickly adjourned. Contract abruptly terminated shortly thereafter. And (unusually for him) no further work from this giant Bank. The truth is painful, yet people in general, and it would seem, bankers in particular, go to great lengths to avoid it.

(NB: The American experiment in Bancassurance, like Mitterand's disastrous nationalization of the French banks was eventually reversed, the ill-informed "guilty" architects, of course, inculpable, and unpunished.)