Showing posts from December, 2008

Is Economics more like Biology or Mathematics?

I am reading more and more commentary around the value/lack thereof of Mathematics applied to Finance. You can find it in the comments on this very blog. The argument usually goes that the field has gone overboard on complexity, witness the synthetic CDO's that triggered the contagion of the subprime crisis. Other answer that mathematics is just about models and models are worth what they are worth no more no less. Basically it seems the debate is about ego between those that idolize models and those that intuitively distrust them.

Biology reminds me of Economics a lot. Except over there the debate is not that polarized. It is clear that mathematics is a support tool in the complex field of Biology. People use it for what it is good at and don't take it to the logical extremes. The field is still more medicine field practitioners than differential geometry theorists. And that is probably a good thing. It is however providing new insights in the emerging field of system…

Monetary correlation and the death of Diversification

Good, anonymous, article entitled "all fall down" (subscriber only) in the FT.

The gist is simple enough: the investment theory of diversification was based on the fact that asset classes performances are uncorrelated and by spreading your bets, you will hedge your risk. Since the assets are uncorrelated, you never get stuck with all down. So when ALL asset classes go down in value, together, what does that tell you?

The article draws 2 conclusions 1/ one the monetary one, on a decreasing volume of money prices will go down as indexed on this money 'gauge'. Remember if inflation is always and everywhere a monetary phenomenon, so is deflation. When all prices go down together isn't it a sign of indiscriminate monetary impact? All boats go down in a low tide. 2/ investors are correlated, through psychology and leverage, in their selling behavior and if they are all diversified then all asset classes get hit which defeats the purposes of diversification in the …

Blame it on Demographics

I am convinced that this crisis we are in is mostly due to demographics of the baby boomer generation. Blame it on them.

The boomers are starting to retire, their production has peaked, their cash inflow has peaked, their leverage has peaked, their consumption has peaked. They will start selling assets to support their lifestyle in retirement. The convulsions right now are the beginning of this transition.

When all is said and all is done, the Japanese crisis was one of aging demographics as well. I got 4 kids on my own, doing my part.

Demographics and monetary levels drive the current financial crisis.

Quants going forward

Amid the worst downturn in banking since ever, quants are still finding ways into the industry according to this report. The survey of quant farms, who globally produce 2000 man a year, finds that quants are in demand from hedge-funds to banks in order to price counter party risk. "Classes are placed at 60% by this time of the year" says one director of department "versus 80% in previous years." Basically those that were blamed a year ago for setting off the August 2007 panic are now asked to figure out what the hell is going on. As a side note, I am reading "physics of finance", a manifold based modeling of finance that quickly starts drawing on the tools developed by math for theoretical physics, both gravity and quantum theories. For example it models arbitrage as space curvature. Space curvature is captured in general relativity. Money is a force?

Madrid blog--Different Perspectives on Medicine


One of my most pleasant surprises here in Madrid is the discovery of a pediatrician who not only gives you his cell phone number (that he picks up), but who will make house-calls. With four children, one of whom is in his first year of preschool, can I say what a life-saver this is.

Dr. J is probably way over-specialized to be dealing with my children's flus and sniffles (he's also a neonatologist), however, he never makes me feel bad when I call him, even one time when the school secretary sent my daughter home saying she had conjunctivitis and it turned out to be a pimple on her eyelid. I am under no illusions that tending to my progeny's medical needs has much to do with what he studied in medical school, however since the morning portion of his work is related to social-security and making the rounds of day-cares, I feel like a relative prize--something along the lines of Mrs. Pumphrey with her pampered lap dog Tricky Woo from the BBC series "All Crea…

Chocolate con Churros--The Neighbors Strike Back

Some of you may have become acquainted with our neighbors in my previous blog entry. Since that time, they have not been idle. In addition to a hostile visit from the forty-something single woman who lives with her mother in the apartment below us, the building association (representing the owners of the exactly 12 units in this place) sent us a certified nastygram citing "numerous complaints" about the noisiness of our children and telling us that noise is forbidden in the building before 9am. Almost none of these people, in the almost four months that we have lived here, has ever bothered to introduce themselves to us, but they apparently organize enough amongst themselves to dispatch certified communications via the post office.

None of this bothers my French husband in the least. He, himself, has vivid childhood memories of ongoing noise complaints (regarding his brother and himself) from the curmudgeonly old lady who lived in the apartment below his family. One day, in a…

-75 bips

Don Quixote is at it. Merry Christmas.

A new US hege-money?

Good story, published this morning in the FT. Theme is that, far from a US dismissal, with its status as borrower of last resort, the US can fund the rest of the world that has lost access to such funds.

Contrary to popular opinion, the current crisis has very little to do with the Armageddon that Nouriel Roubini, professor of economics at New York University, predicted over the past few years. In his mind, the widening US current account deficit would eventually top the willingness of the rest of the world to fund it, causing the US dollar to crash while long term interest rates on US Treasury bonds would soar.

That has little to do with this crisis: the US has become the only remaining super-borrower, able to issue thousands of billions of dollars in debt at record low rates while the dollar strengthens. People are unwilling to lend to almost anybody except for the US Treasury. This has allowed the US to provide – at record low cost – about $5,000bn (£3,325bn, €3,700bn) to bail out i…

Tilting at Windmills: Fed to SLASH rates

In bold flashing tittles this morning, the FED are ready to slash rates. To what? Zeno's paradox is saving the FED, keep on SLASHING in half and you will never reach zero.

Don Quixote, does anyone else see the resemblance?

Tesla and Honda on TopGear

Reader Simon Temple sent me the links to these 2 videos from last night TopGear show, a popular car show in the UK. Worth you time.

Update on the Tesla. It appear I am now #215 and on schedule to have the car in Feb? We will see.

Spoiler: supercar performance, crappy reliability. They have 2 cars, both break down :( not good.

Second is about the Honda Clarity. A hydrogen plug-in hybrid. It is electric but the electricity comes from a hydrogen engine. They claim the car is the savior of the world.

I don't know what to make of the conclusions. I am not entirely sold on the hydrogen as it is quite expensive to manufacture. It is abundant but difficult to make. I am sure there are 1000 startups working on it. We need better batteries and there are 1000 startups working on it. I think it is peugeot going Li-ion.

At the end of the day, I suspect it is not going to be about technology alone but about distribution, reliability, safety, cost and all these good things. Coolness will als…

FT interview of Trichet

The president of the ECB engages in a rather candid video interview with the FT. In my opinion some good some bad some neutral.

The Good.
Around minute 5 Trichet says clearly that the amount of risk in the system was not known, the risk was mispriced and that regulation should focus on amplification of cycles.

On the first point, I still personally have trouble understanding the total level of money in the system. M3, it seems, does not capture all of the private debt issued by bank. He is probably calling for a better monitoring of total monetary levels in the system. That means re-regulation of the capital ratios. Good luck controlling the debt levels. I would argue that letting the invisible hand fine-tune the debt levels may not be a bad thing but it needs to be measured, otherwise things can get a little out of hand (pun!).

The mis-pricing of risk is very interesting one. Risk in an on itself is not a bad thing if debt is adequately priced so that defaults never destroy cap…

No more ego-surfing

I used to subscribe to the google news alert for "Marc Fleury". There was a time when that would yield a couple of articles a day. No longer, lately it talks about a hockey player that makes the news "Marc-Andre Fleury" a mighty goal tender apparently. So today I un-subscribed from the alert. It was a relief and a bit of nostalgia at the same time. Ticking clocks.

Scalable Nanotech

From Nature. The most robust/light material known to man is graphene (carbon in one atom thick configuration), problem was it was tricky to build. Enter a group of clever aussies.

Sodium; ethanol; heat; sound waves: those easy-to-come-by, cheap ingredients are all that John Stride and his team at the University of New South Wales in Australia needed to make a couple of grams of pure carbon in the form of graphene.

Graphene is just one atom thick and looks like molecular chicken wire. First isolated in 2004, it is the strongest material known, and should make tomorrow’s mix of power-hungry consumer gadgets lighter and more efficient. The problem has been that graphene is devilishly difficult to manufacture in large amounts.

Stride and his colleagues first reacted ethanol and sodium, then broke down a solid intermediate of the reaction by heating. This generated a fused pack of graphene sheets that they then broke apart with gentle sonication.

I like clever engineering. Finally a mas…

Midnight regulation

From science 'policy news alert', the Bush administration is rushing through last minute regulations before leaving.

More "Midnight" Regulations Issued. The Bush Administration has finalized several new last-minute, or "midnight", regulations that will take effect 30 days after publication in the Federal Register. The Interior Department's Office of Surface Mining announced a rule that would allow companies to dump mining debris within the current 100-foot stream buffer zone if they show why they cannot avoid doing so. The Department's Bureau of Land Management announced a new rule that would eliminate the ability of Congress to block mining projects on public lands when "an emergency situation exists," a move certain to draw legal challenges. Interior also announced a new rule that allows concealed and loaded guns to be carried in national parks located in states with concealed-carry laws, a departure from the original proposal that only…

FT Dizard says "Kill CDS market now"

Thought provoking article by Dizard in the FT.

He lays the blame at the feet of Credit Default Swaps for the negative feedback loop afflicting the current financial world.

Consider capital raising. Writers of protection in the CDS market must now hold increasing amounts of cash as margin against the probability of default for the "reference entities" or borrowers they bet on. This has led to the sale of tens of billions, if not hundreds of billions, of dollars, euros and pounds worth of securities to raise that cash.

Some of those buyers hold actual exposure in the form of bonds or supplier contracts; many more have just made side bets.


So CDS dealer sales of Citigroup equity through derivatives means higher equity volatility, then higher CDS spreads, leading to more margin calls, leading to more sales of bank stocks . . . This has become a system-wide tail-swallowing exercise in lunacy.

Just like bank runs of yesteryear brought the banking system to its knees during the…

T-bill 4 weeks: 0.000%

There it is yesterday on Dec 9 08, the T-bills interest rate went to zero. First time since 1940. People believe T-bills are safer than cash which means they believe rates will go below zero so the asset will appreciate, and they don't want to pay for keeping the cash in physical paper form. This feels like a massive bubble.

Negative interest rates

This feels so absurd to me that I don't really know what to make of it. Commentary from Wolfgang Munchau is usually down to earth but this feels preposterous.

Let us assume for argument’s sake that prices will indeed start falling from next year for a sustained period. In such a situation, the central banks would have no choice but to cut interest rates to zero. What then?

There is actually quite a lot central banks can do in such a situation. For starters, they can drive right through the zero boundary and impose negative interest rates. A negative interest rate is like a tax on deposits. People could avoid paying this tax by moving into physical cash.

But there are costs associated with physical storage as well. The mattress is not a safe cash storage device. You might have to invest in a safe deposit box, or pay higher insurance rates against theft. Obviously there will come a point when people may be prepared to do just that. Some lower boundary for interest rates surely exists.…

A world government?

I was always part of the 'international' community. Born in France, mother Spanish, traveled around due to my father's job, emigrated to the US etc etc. I am very much a citizen of the western world. So this article resonated with me. It argues that the time is right for a world government.

First, it is increasingly clear that the most difficult issues facing national governments are international in nature: there is global warming, a global financial crisis and a “global war on terror”.

Second, it could be done. The transport and communications revolutions have shrunk the world so that, as Geoffrey Blainey, an eminent Australian historian, has written: “For the first time in human history, world government of some sort is now possible.” Mr Blainey foresees an attempt to form a world government at some point in the next two centuries, which is an unusually long time horizon for the average newspaper column.

But – the third point – a change in the political atmosphere sugge…

Tesla deserves a bailout?

From yahoo, Tesla should be bailed out to the tune of 400M. (As a side note, Sarah Lacy has been packing on the pounds!!!) I am supposed to get the car in February, i am counting the days.

Merrill Lynch: -96% REVENUE FALL

Can you spell doom? This is horrendous. I thought it was bad, but not this bad.

How can a business tank -96% in revenue, we are not talking profit, but revenue!!!

From a good friend on Skype (OR connection):

$248,000 Average Pay

Even if Merrill set aside nothing for compensation in the fourth quarter, the firm’s 60,900 employees still would reap an average of $184,000 in compensation and benefits for the full year.

In 2007, Merrill paid out a total of $15.9 billion in compensation, or about $248,000 per employee.

Merrill’s revenue for the first nine months of this year totaled $834 million, or $13,695 per employee, compared with $19.4 billion in the 2007 period.

So they pay 248K per employee with revenue this year 13K per employee. Ouch...

I said earlier that the revenue of the banks was a function of volume x velocity. Since monetary volume is going down and velocity is halting (no CDO for example) you have not a linear problem but a square one. But -96%!!!

The shadow banking system is dead…

The tone of commentary lately.

Has rapidly changed.

First there is a rush to the extremes, conspiracy theories and astrology make a comeback. All of the sudden people are conjuring up all sorts of doomsday scenarios. Historic timelines get longer with comparisons going back 100-200 years. A british journalist talks about world wars and reminds us that the last credit crunch gave us nazi germany. The crazy talk is off the charts.

Then the finger pointing is thick, kind of disgusting and in my opinion somewhat arbitrary. We need scapegoats. It all smells of panic and reminds me of "when you don't know what to do, blame someone".

On the positive side, I believe this crisis to be different than every other by the presence of the internet. The speed and the amount of information is a new variable, does it accelerate the timeline of the crisis? Does it make us stronger by allowing us to figure out what is going in a Open Source fashion with wide information sharing (given enough eyes all bugs are shall…

Jefferson in 1802 talks about 2008

A good friend of mine sent me this quote by Thomas Jefferson.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Monetary control is a matter of public legislation, that is the #1 lesson we must relearn from the 08 fiasco. Money creation is never to be left entirely to the invisible hand.

Ben is fighting it

That is the monetary base. It is going way up, courtesy of Ben "flood the system" Bernanke... However people are deleveraging, taking on less debt. So you have this pent up offer of money building up at the banks level, they also do not want to lend... this feels unstable to me, but what do I know.

Gone, Over, Toast

not for the faint hearted, from financial armaggedon.

The FIRE economy based on transaction and debt volume/velocity: gone, over, toast. Housing market based on speculative flipping and one-person households: over, gone, toast. Loose lending by delusional lenders to risky, over-indebted borrowers: gone, over, toast. Borrowing based on rising real estate values: gone, over, toast.

The notion that we "need" more of anything: gone, over, toast. The idea that you can force lenders to lend to uncreditworthy borrowers: gone, over, toast. The idea you can force people drowning in debt to borrow more: gone, over, toast.

The FIRE economy is Financial, Insurance, Real Estate. The point about Debt volume/velocity is well taken. Debt volume is going down at the consumer/hedge fund level and velocity is going WAY down (flipping). Already the investment banks who were living off fees from "volumeXvelocity" disappeared over night. Ugh.