Showing posts from January, 2009

CDS are good, Naked CDS are bad, OK?

Following Barry K comment on my previous post I went and read what the FT blog had to say about the debate. The only thing bone-headed here is the coverage and the knee-jerk reaction to anything legislative.

Let me see if I can give a 10 sec crash course on CDS. A credit default swap is a protection against a default of debt. If you hold a bond, you can buy "protection" against default. You pay a premium, and if the bond defaults you get the principal back. If you don't hold the bond then it is called a naked CDS. You pay the premium on a fictitious bond (you never paid the principal) but if it defaults you get paid the principal, pooof! out of bad debt, comes more bad debt.

CDS are good, good in the theoretical economic value sense as it moves risk around from a party unwilling or unable to assume the risk to a party that is willing and ,again in theory, able to assume the risk (AIG anyone?). When the bond defaults, the system remains strong. This is good from a syste…

Banning Naked CDS

Interesting bill being proposed, from bloomberg, I have blogged many times about naked CDS, here, here, here, and here. Finally someone in the house took notice :)

House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The document, distributed by e-mail by the committee staff in Washington, would also force U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse.

As much as 80 percent of the credit-default swap market is traded by investors who don’t own the underlying bond.

Naked CDS are evil because they demultiply the effect of bad debt. 1x bad debt is bad enough but if many Nx people bet against bonds then you have Nx the impact of debt imploding. Apparently that ration is 80 to 20 or 4x. Of course there is some noise in there about a professor who think it is a bad idea and…

Banking led recessions and Deflation

The real subtitle is "a failure to nationalize the banking system, if needed, will lead to the second great depression"

I have been mulling over the little fact, shown in Rogoff's paper, that equity recovery lagged economic recovery in banking led recessions in general and more particularly in the Great Depression. I have also been following the growing confusion in the inflation vs deflation debate.

I have been a deflationista since the beginning, even during last years oil spike because "inflation is always and everywhere a monetary phenomenon". If inflation is always and everywhere a monetary phenomenon then so is deflation. By monetary levels I mean M3+Debt, total money supply must include debt levels. Meaning FED money + bank leverage both regulated and unregulated (and here is where it all went poof). Unregulated debt equals unregulated money supply, and the invisible hand was just been mainlining lines of debt coke after lines of debt coke until it overd…

How to nationalize banks

I wanted to follow up on the comments from the previous post. There is also a good FT comment this morning on how to proceed, called To save the banks we must stand up to the bankers.

If you hid the name of the country and just showed them the numbers, there is no doubt what old International Monetary Fund hands would say when confronted by the current situation of the US: nationalise the banking system. The government has already essentially guaranteed the system’s liabilities , bank assets at market value must be massively lower than liabilities and a severe global recession may yet turn into the Greatest Depression.
Yet no one other than the government is available to recapitalise the banking system. Without sufficient capital, lending cannot be stabilised and any incipient recovery will be strangled at birth.
The total of these figures suggests the government will need to come up with working capital in the region of $3,000bn-$4,000bn. If things go well, the losses to the tax…

TechTicker: Nationalize banks

Excellent article over at by Aaron Task. Excellent interview. I should have read up after juha talked about outrage at Thain actions at Merrill. Basically shelling out $15B of taxpayer money in bonuses. Just sad.

Key issue, as stated in the entry below is that banks are not lending, and hoarding capital, when not stuffing it in their pockets as in Merrill.

Key quote from the video:

The new administration is tiptoeing around the N word, like it will bring about communism in this country. It is time we cut through the chase, we are nationalizing banks and should do it wholesale to clean up the system.

Amen brother!

The socialized future of credit

Interesting newsbit over at the FT on the French govt financing customers or EADS for Airbus deals.

The assistance to Airbus is the first time the French government has used the Société Financement de l’Economie Française, or SFEF, which was set up in November to stabilise the banking system, to support other industries directly.

The SFEF earmarked €1bn last year for the finance arms of Renault and Peugeot Citroën. But these finance arms are, strictly speaking, banks and regulated as such.

I was mulling over the debate of how to recapitalize banks to get credit flowing again. Witness the pigs hoarding cash given to them. There is no private sector solution. I was gravitating towards "shot the pig in the head, provide financing directly, end the masquerade". Glad my comrades in France are that decisive. Good for them, there is a certain hypocrisy in the US debate. Free banking my ass.

PS: my brother works for BNP selling hedges for such deals. He tells me SFEF fronts with th…

Litterally throwing money out of helicopters

John Hempton, over at Bronte Capital is on my blog rool and I usually like his commentary. This time however he has gone over the deep end with an entry titled "why the federal reserve should literally throw money out of helicopters".

The gist of it is simple and I have covered it here many times, the money supply and velocity is shrinking by deleveraging and hoarding of the private sector, so the public sector is trying to re-inflate some with QE/printing presses and some argue that "it ain't enough" so the outlook is still deflationary. The only way out of the liquidity trap, where people hoard cash in deflationary expectations is to create inflationary expectations by ... yes, litterally throwing cash out of helicopters.

I find the post frankly hilarious. Of course the same effect is achieved with tax cuts but they would cost more than 2B.

Is EEE killing the PC industry?

and is it its future?

I was talking with a good friend this morning and he wasn't aware of the EEE family, the B20*. These netbooks, sub $200 PC are all the rage with aficionados.

And what is not to like with specs like 1.6Ghz, 1gig, 160gHDD, Wifi N, HDMI so on and so forth, oh and i did I mention they retail for less than $200? The NYT has a good article this morning on the impact of these little beasts. It basically claims that it breaks the traditional PC business model.

Mr. Title, a 35-year-old new-media manager at a film production company in New York, has dropped his cable subscription and moved to watching most of his television online — free. While shopping for a new laptop for his girlfriend recently, he sidestepped more expensive full-featured computers and picked a bare-bones, $200 Asus EeePC laptop, also known as a netbook.

“We’ve reached one of those moments in tech history when there are low-priced and free alternatives that are both user-friendly and reliable enough …

Dimitri the Stud

Recently came across the "Dimitri the Stud" message supposedly left on a woman's work voicemail. The "elegant" lady in question caught Dimitri's attention after a chance two-minute public meeting. Whether real or fake, this is one of the funniest audios I've listened to in a long time. Supposedly the "real" Dmitri is actually from Toronto and runs a website called Dmitri the Lover. There, for a price, he offers men advice on how to improve their game in the dating scene.

Andy Oliver and I had a chuckle about the advice giving business. "That's awesome. So he's an expert....yet "very single"... Reminds me of our field. Lots of advice from people who are not actually good at whatever it is they are doing :-)"

Doing nuthin'

My father recently sent me this cartoon. Hilarious.

My father is old school, you have to be "doing something". It is a moral and chemical imperative for him. He cannot stand still, it's killing my mother. I inherited the obsessive gene from him, and thankfully a bit of the lazy gene from my mother. I actually work at doing nothing these days.

What I mean by "nothing" is actually a more active mental life than I had by the end of my previous life. Don't get me wrong JBoss was an extremely gratifying experience, intellectually and otherwise -- not everyone gets the chance to rock an industry everyday-- but today I get time to study what I want, be it economics, automation or my old mathematics and graduate physics. I am learning again... making connections again. I always liked that. Intellectual pleasure for me can be very real.

One of the hardest things, post JBoss, has been to let go of this "fascism of doing". Getting up and feeling like …

Google rewrites options

I don't really know what to make of this article from the FT. Bottom line is that Eric Schmidt, the CEO, has announced that they will reset the strike of the options since the price of the stock has gone down tremendously.

The new option plan will let employees whose stock options are “underwater”, or carry an exercise price higher than the current share price, exchange them for new options at existing prices. The arrangement, prompted by a 59 per cent plunge in the Google share price from its peak in late 2007, was intended to give workers “more incentives to remain at Google” and contribute to its success, the company said.

Option repricing proved controversial in the technology bust, when it was seen on Wall Street as a way to protect workers at a time when other shareholders were suffering. Responding in an interview on Thursday, Mr Schmidt said: “Would you prefer we had the Wall Street firm’s bonus model? That doesn’t seem a very good model to me.”

He added: “Part of the compens…

Tina Fey Golden Globes Speech

Just another reason why Tina rocks.

...I want you to really know how lucky I am to have the year I've had this year and, if you ever start to feel too good about yourself, they have this thing called the Internet! You can find a lot of people there who don't like you! I'd like to address some of them now! BabsonLacrosse, you can suck it. DianeFan, you can suck it. Cougar Letter, you can really suck it 'cause you've been after me all year...

I'd like to see a "True Confessions of a Hater" blog entry someday, myself. More specifically, I'd like to know what is so satisfying about nurturing an online hate obsession with somebody you've never met, or a product you wouldn't condescend to use.

Tina's right--message board anonymity is undoubtedly a factor. She's also right when she says the the moment you register to a comment board to respond, you've become even crazier than they are. Then there's the simple fact that, on the Inte…

DOW 6000

Back to the financial war. What a start to the year. I sold puts 2 weeks ago with a safe margin and got put on 2 out of 4 trades, enough to post a loss. For those who don't know, selling puts really says 'I am selling you insurance, even if the stock goes below a price, I will buy it at that price". If you own stock it is a hedge. For me it is a way of saying "I am ok getting in the market but at a steep discount from now". I got battered because the rate of fall was bigger than my discount. Granted I lost a lot less than if I held the stock, but still, no loss is fun.

I got to move on. I am fundamentally bearish, as the financial debacle unfolds (to 3.6T according to Roubini, so we are not there yet) and we finally nationalize the commoditized lending facilities formerly known as banks.

Good news from IBM may clear the skies for a little while. I think we may visit DOW 6000 soon. I believe in a fundamental 7000-9000 band of volatility and will be selling…

Good Riddance. Letterman top 10 Bush moments

Let's not put an idiot back in the white-house. Ever.

I turn 37 and...

...get my own blog!

Thanks to Marc and Andy Oliver for hosting my previous blogs, and for helping get this one set up. My previous LinuxIntegrators posts to come. I will continue to cross-post on Maison-Fleury, as well.

A new year, new address, new friends, re-acquaintance with old friends, and more progress on my play.

Thank you to everybody who sent me birthday wishes.

Un abrazo,

Viewing Habits: "House"

Recently, Marc and I have been watching television series by dvd, or, when we catch up: iTunes, years after the original seasons come out. Given our limited time (evenings when the kids are in bed), we would rather sacrifice hipness for enough feedback on the show to justify the commitment. We used to watch more movies. The problem is it requires a lot of research to not completely waste your time there, given the high proportion of duds and formula flicks churned out every year.

A good television series, on the other hand, is a known quantity. Once you wind up investing the time getting to know the characters and getting caught up in the story arc, you'll even put up with the filler episodes, hoping for the eventual plot development crumb. It's sort of like catching up with an old friend. You may not always have much to say to each other, but there's a reassuring comfort in your shared experience.


You've got to love a series based on a misanthropic diagnostician, …

Lost: the wormhole theory

Nathalie and I just finished the 4th season of Lost. We both loved it and were hooked from day 1. Some say they never get into it, that the series "jumps the shark" at the first episode. Truth be told we often wonder "how the hell the writers are going to make it out alive from the plot". Today there is a good piece in the NYT that explain that a bit. It is about the man who keeps the continuity of the series.

For those that follow, I am pretty sure I have figured out something about the island: it harbors a wormhole. In the last episode of season 4, Ben gives away two bits about "Casimir effect" and "exotic matter". They are linked to wormholes. A wormhole is a theoretical prediction from general relativity. You can look it up on wikipedia. Exotic matter is the way to stabilize a wormholes entrance. A wormhole allows supraluminal travel as well as time-travel.

This explains the jumping through time that Desmond experiences as well as th…

JBoss: Behind the Headlines?

For those of you who suggested I write a "JBoss: Behind the Headlines" novel, thanks for the vote of confidence. There are a lot of great stories there. However, relying solely on our little company to paint a picture of the software environment and entrepreneurial experience in the late 90s, pre-recessionary 2000s is over-reaching. A novel that captured an era would involve getting a lot of other people to tell me their stories, other companies, other exits, the VC perspective, the IPO experience (which is dead for now), the bankers, the customers, the corporate competitors... research and interviews I don't have the energy to do.

I could, however, be tempted to draw on my JBoss experiences to write a blog entry-format satire of the corporate IT and entrepreneurial world my former colleagues and I came from. Think something along the lines of Lucy Kellaway's Martin Lukes saga in the FT. My time and writing constraints favor an episodic story flow, with the abilit…

The Open Source Developer's Wife

When I was active in public relations for our software company, JBoss, I sometimes found myself in the awkward position of being mistaken for an engineer. Trying to engage in an elaborate discussion of how X works with me is pretty much equivalent to doing a strip-tease for a blind person. I don't care so much how X works; I'm more interested in what X can do for me. I'm not an engineer, I'm just married to one.

My 37th birthday is coming up and what I'd like most is for my husband to set up a separate blog for me on Blogger, archiving my posts on "Maison-Fleury" (I'll continue to cross-post on this blog), and my previous blog, "Objective Correlative, Confessions of a Wayward Academic and Would-be Propagandist," from Andy Oliver's Linux Integrators.

For his recent 40th birthday, Marc, dear old fashioned gentleman that he is, suggested I get a pair of DD, stripper-grade knockers. I declined. Ironically, it is going to be a lot harder for m…

Book Review: The Sum of Our Days, by Isabel Allende

I just finished Isabel Allende's "The Sum of Our Days" (La Suma de los Dias), an autobiographical novel, focusing mostly on the past fifteen or so years of her life in Marin County, California. Since the last thing I read by Isabel was "Eva Luna," many years ago, I was surprised to learn, in a FT interview with Richard Waters, that Isabel has been in California for a while now. I was intrigued enough to buy the book. "The Sum of Our Days" appears to be the continuation of a dialogue with her deceased daughter, Paula, begun in a book of the same name that I have not read.

Since one of the challenges of my life is trying to find a balance between writing and raising four young children, I'm always interested in autobiographical material by authors I like. Mostly I want to know where they get their inspiration and how they find time for their writing. In Isabel's case, it's clear that a lot of this material comes from her own life and the l…

Rogoff on banking led recessions

I had read the research by Rogoff and Reinhart a couple of weeks ago forgot to blog about it and reader Thierry Janaudy resent it to me (thanks) over the weekend. Rogoff is professor of economics at Harvard.

What they do is look at historical data of economic recessions driven by financial banking crises. These are different from cyclical recessions. They study real estate impact, equity impact, unemployment, GDP, public debt and duration. It includes emerging markets because against conventional wisdom financial induced economic crises are remarkably and structurally similar.

The charts speak for themselves, this is reprinted without permission so I leave them small go read the initial article for full pictures, it is an easy read as it is mostly historical data, with no analysis and models. It is also very sobering.

Below, Real estate downturn: average -35, duration 6 years (US 07: -25%, 2 years)

Below, equity downturn: average: -55%, duration: 3.5 years (US 07: -40%, 1 year)

Below, …

Hedge Funds must evolve or die

I read a bunch of hedge fund newsletters and blogs (favorite: fintag) and the news is all doom and gloom. This is an industry that is being decimated. Most hedge funds were fee structure scams masquerading as asset classes, as one commentator puts it, and are suffering greatly. I run my own assets like a mini-hedge fund, zero leverage, options gazillion, screw your fees.

As an investor I have several problems with hedge funds.

1/ On average they are average.
I am with Taleb, true alpha is hard to come by. Witness Falcone, he made a killing betting against subprime in 2007, only to score a relatively poor -30% in 08 (hey I beat the pants out of him by being mostly neutral). Because they are unregulated they can invest in all kinds of stuff they don't understand. Being a hedgie is akin to working on a electric saw with no protection. Careful with those fingers!

2/ Too much leverage.
The dirty little secret of the industry was explained to me by a starry eyed hedgie frenchman during my…

The modellers manifesto

via FT-Alphaville, a quant manifesto written by Derman and Wilmott.

Physics, because of its astonishing success at predicting the future behavior of material objects from their present state, has inspired most financial modeling. Physicists study the world by repeating the same experiments over and over again to discover forces and their almost magical mathematical laws. ... The method works. The laws of atomic physics are accurate to more than ten decimal places.

It's a different story with finance and economics, which are concerned with the mental world of monetary value. Financial theory has tried hard to emulate the style and elegance of physics in order to discover its own laws. But markets are made of people, who are influenced by events, by their ephemeral feelings about events and by their expectations of other people's feelings. The truth is that there are no fundamental laws in finance. And even if there were, there is no way to run repeatable experiments to verify the…

Madrid blog -- Ski at la pinilla

We live on the last floor of an old building in the center of Madrid. From the living room, facing west, we have a view of the mountains surrounding the city. I have been seeing snow capping the mountains for the past month. Madrid is in fact a mountain city, sitting on a plateau at 700m, that's 2100ft for you metric challenged ones, you can tell by the air too, dry and cold.

Being an avid skier I finally 1/ bought a car, which is completely un-needed in this city 2/ to head out to a local ski resort. I have never lived near ski slopes. So 2 days ago, yaya, 9 years old and me headed out to la pinilla. Yaya is a great snowboarder by now and can ride pretty much any terrain. La pinilla is no great resort, in fact it is pretty sucky, it is really tiny, with really 2 or 3 slopes worth anything and a long blue slope coming down. But I loved it. First of all having ski one hour away from my house is a luxury I never experienced before. Second, this is a fantastic resort for kid…

Controlling monetary levels

2 articles in FT today touch upon the same topic from different angles. I have been talking about monetary levels since the August 07 panic.

First article argues for control of debt levels by central banks. The invisible hand did make a mess of things because the investment banks and their hedge fudge clients only had interest in increasing leverage taking too much risk and reaping the rewards of taxing the flow, and when it blows up, you blow up. Reader Arthur B calls this asymetric risk. The great depression saw the introduction of legislation limiting the leverage and fraction the commercial banks could have between debt and capital/deposit. Investment banks were, unfortunately, free of that constraint. They went up to 50x leverage. 10 is not enough, 50 is too much, it doesn't take a genius to say "so what about 35 for the ibanks, 2 for the hedge funds?" Controlling debt levels is the key, as when it goes in reverse it WILL kill capital. Too much debtism kills capi…

Venturi Volage

As I await the delivery of my Tesla, which should be sometime in Q1 (not holding my breath), a good friend of mine mentioned the Venturi Volage. Denys is french is in his late 50's and has spent his career around electric cars. He mentioned this innovation from Michelin, see the picture, which is basically an electric engine in a tire. The tire does power and suspension, in two different engines and apparently according to Denys, who's driven the michelin tires, was a unique feel of grip, it gives a new definition to 4-wheel drive.

Because the engine is in the wheel, it is not on the chassis. There is NOTHING on the chassis that belongs to the engine (except batteries of course). And so the resulting chassis looks something like this.

Venturi is coming out with a supercar that looks amazing, it is based on the michelin tires.

I am tempted now.

A brief history of princely debasement

Excellent repost at The Big Picture. Originally from Institutional Advisors. It is a brief historical facts of taxation abuse and how debasement of the currency has always been the way of government. It is a good read.

The current way of debasing of course is for governments to print money to themselves, by central banking and fiat money. This creation of money, or fiat money, can effectively be used as a stimulus, in the Keneysian sense. In the US it is used to achieve quantitative equilibrium.

Critics point out that it is appropriation by the community, as the government has created a pool of money for its own spending, without equivalent and offsetting income or taxation. Furthermore inflation will be a residual effect of the creation of this monetary mass. How much inflation will result is fuzzy and depends on price elasticity of goods. China has exported net deflation, through its immense production capacity, just in time production gave us great elasticity. In other words, …