This
weekend’s edition has plenty to chew on. In addition to the ongoing discussion
on central bank policy, Basel 3 reports from BIS and the very helpful “understanding
repo markets” are some of the highlights. For traders, the absolute must-read is the piece on how Keynes traded for 25 years. And do take the time to see the free
coursebook on international economics!
Previously on MoreLiver’s
REGULATION & RISK
Top 10 Operational Risks: The third and fourth
risk areas in a 10-part series – All
About Alpha
Implementation of capital standards:
assessment reports published by Basel Committee – BIS
Three
reports assessing the rules that will implement Basel III in the European Union, Japan and the United States.
Wanting to Hedge and Wondering How – All
About Alpha
State Street Global Advisors hosted a webinar
Thursday morning on the management of tail risk, based largely on a survey of
institutional investors and consultants, both in the United States and in Europe.
Financial innovation: The bright and the dark
sides – voxeu.org
Even before the crisis, many economists warned
that financial innovation has a dark side. This column uses new cross-country
data on financial innovation and provides evidence that financial innovation
can lead to more volatility, more fragility, and more severe losses. But it
also finds evidence of improved growth opportunities, better financing, and
increased R&D expenditure.
Ex-SAC Capital Manager Tells FBI Fund Used
Insider Data – BB
Triparty repo and the clearing bank risks – Sober
Look
Repo markets have functioned well for decades.
However this recent paper published by the NY Fed (below) outlined potential
systemic risks in the tri-party markets that became apparent in 2008. The
concerns are not with the repo market itself or the lenders/borrowers under the
contract, but with the clearing banks that facilitate triparty repo
transactions.
Repo transactions and shadow banking – Sober
Look
We continue to get questions about the repo
markets and the structure of repo transactions. The attached paper from the
Financial Stability Board provides a good overview of repo and securities
lending markets (including rehypothecation practices).
Money, Power and the Rule of Law – Simon
Johnson / EconoMix / NYT
Economic policy is always torn between helping
the broader social interest – lots of ordinary people – and favoring particular
special interests. Unfortunately, special interests typically win out in the
kind of situation we have in America in 2012, when it’s all about spending money to win friends and
influence people.
HIGH FREQUENCY / ALGO
This Is Why High Frequency Trading Will Never
Go Away – ZH
A Speed Limit for the Stock Market – NYT
The problem with high frequency trading – Felix
Salmon / Reuters
TRADING
Keynesian Investing: Changing Facts, Changing
Minds – The
Psy-Fi Blog
John Maynard Keynes’ remarkable investment
record as the effective Chief Investment Officer of Kings College Cambridge over a period of a
quarter of a century. It’s a fascinating
insight into the evolution of one individual from underperforming, overconfident,
macro-based and behaviorally biased to an outperforming, realistic,
stockpicking rationalist.
An Investor's Guide to Famous Last Words – Motley
Fool
What If Google Had a Hedge Fund? – HBR
The world's biggest and fastest search engine
can't help but generate terabytes and petabytes of actionable investment
intelligence.
The New Nonsense: Leaving Finance – The
Big Picture
Every now and again, a meme pops up that cries
out to have its head chopped off. The latest such idiocy: People leaving
finance to find more “fulfilling” work.
MARKETS
Goldman Sees Stock Plunge Then Surge – ZH
Investing in credit markets, with matrices – alphaville
/ FT
Six observations about index CDS markets – Sober
Look
When Career Risk Reigns – John
Mauldin / The Big Picture
A tour of recent research, which shows that
correlations among a wide variety of asset classes are increasing. It comes as
no surprise to serious investors that it is getting ever more difficult to
construct a diversified portfolio.
ECONOMICS
Why do top economists think the recovery has
been so slow? – Free
exchange / The Economist
Survey Sep18-28: we asked economists why they thought the
recovery had been so slow.
The tightest purses – Buttonwood’s
/ The Economist
Here lies a problem that has dogged nations all
through this crisis (and still dogs nations outside the euro zone like Britain and America). The collapse of tax revenues in 2008 and 2009 caused deficits to
soar, and made public finances look unsustainable. But when you start from a
very large fiscal deficit, it is hard to get back to balance.
Why the UK output gap could be a
chasm – alphaville
/ FT
Capital Economics published a long report: a) fiscal and monetary policies may be far too tight and b) there could be plenty of scope for the economy to grow strongly without inflation rearing its ugly head.
Capital Economics published a long report: a) fiscal and monetary policies may be far too tight and b) there could be plenty of scope for the economy to grow strongly without inflation rearing its ugly head.
Macrofinancial Stress Testing - Principles and
Practices – IMF
The recent financial crisis drew unprecedented
attention to the stress testing of financial institutions. On one hand, stress
tests were criticized for having missed many of the vulnerabilities that led to
the crisis. On the other, after the onset of the crisis, they were given a new
role as crisis management tools to guide bank recapitalization and help restore
confidence. This spurred an intense debate on the models, underlying
assumptions, and uses of stress tests. Current stress testing practices, however,
are not based on a systematic and comprehensive set of principles but have
emerged from trial-and-error and often reflect constraints in human, technical,
and data capabilities.
Fact-checking financial recessions – voxeu.org
The central part played by credit in the deep
downturn and weak recovery fits a recurring historical pattern. Financial
crises correlate with more painful recessions. This column takes a close look
at 14 advanced economies over the past 140 years and shows that larger credit
booms during expansions have been systematically associated with more severe
and prolonged slumps. In short, credit bites back. Measured against the
historical benchmark, the recent US recovery has been far
better than could have been expected.
Annual Report 2012: Working Together to Support
Global Recovery – IMF
Restoring Jobs by Restoring Growth – iMFdirect
In other words, I don’t see how the episode as
a whole supports the interpretative weight being placed upon it as an
anti-austerity parable.
History, gravity, and international finance – voxeu.org
International investment patterns play an
important role in policy debates ranging from global imbalances to banking
crises. This column shows that history should not be neglected on this score.
It suggests that 10% to 15% of the cross-country variation in US investors’
foreign bond holdings is explained by this 'history effect', which reflects
fixed costs of market entry and exit together with endogenous learning.
Does the current account balance help to
predict banking crises in OECD countries? – NIESR (pdf)
Given the magnitude of “global imbalances” in
the run-up to the subprime crisis, we test for an impact of the current account
balance on the probability of banking crises in OECD countries since 1980. This
variable has been neglected in most early warning models to date, despite its
prominence in theory and in case studies of crises. We find that a current
account variable is significant in a parsimonious logit model also featuring
bank capital adequacy, liquidity and changes in house prices, thus showing the
patterns immediately preceding the subprime crisis were not unprecedented. Our
model, even if estimated over an earlier period such as 1980-2003, could have helped
authorities to forecast the subprime crisis accurately and take appropriate
regulatory measures to reduce its impact.
Currency wars as global stimulus – alphaville
/ FT
Evidence that the effects of foreign exchange
interventions are less ‘beggar-thy-neighbour’ and more global stimulus.
Global Economy Course materials – NYU
Stern Economics
Required
MBA course now online. Full course contents, including the textbook
(pdf)
What have the economists ever done for us? – voxeu.org
There is a long list of culprits when it comes
to assigning blame for the financial crisis. This column argues economists are
among the guilty, having succumbed to an intellectual virus of theory-induced
blindness. It adds this calls for an intellectual reinvestment in models of
heterogeneous, interacting agents, following in the footsteps of other social
scientists. This will require a sense of academic adventure sadly absent in the
pre-crisis period.
ECONOMICS:
CENTRAL BANKING
This volume is a collection of the speeches,
background papers and presentations from a conference on "Central bank
balance sheets in Asia and the Pacific: the policy challenges ahead". The event was
co-hosted by the Bank of Thailand (BOT) and the Bank for International
Settlements (BIS) and was held on 12-13 December 2011.
Not so broken – Free
exchange / The Economist
My colleague set out a fairly straightfoward
balance-sheet-recession critique of the effectiveness of monetary policy.
Central banks on both sides of the Atlantic took extraordinary monetary-policy
measures in September, sending stock markets soaring. But politicians – and
markets – in both Europe and America are mistaken if they believe that monetary policy can restore economic
growth and boost employment.
Professor Woodford and the Fed – Gavyn
Davies / FT
Professor Michael Woodford of Columbia University is an extremely
renowned macro-economist, and rightly so, but only recently has he occupied a
central place in market thinking. Since his paper on US monetary policy at Jackson Hole, and the favourable remarks which
Ben Bernanke made about him, everyone is trying to understand what his
influence on the Fed might eventually mean.
An expansionary monetary policy and an
historical conjuncture that happens to produce no inflation will lead to asset
price inflation and deterioration of credit. At some stage, central banks will
have to mop the liquidity or see inflation do it for them. (ahead of its time!)
Don’t call it money printing, rubiks cube
edition – alphaville
/ FT
HSBC had joined the cohorts of the “don’t call
QE money-printing” brigade. We thought
this was a great positive for the mainstream analyst community. Moreover, we
thought their explanation was really good.
This post is a continuation, in which we apply
the analogy to the crisis so far.
Currencies: The weak shall inherit the earth – The Economist
New government priorities and an enthusiasm for
unconventional monetary policy are changing the way the currency markets work