Thursday, March 31, 2011

Detroit Implodes


One of the more striking findings in William Easterly's writings about Third World Aid is how little is learned, just the continual call to double down: it was just not enough or to the wrong people. Similarly, when Detroit recently announced they lost 25% of their populace over the past decade, the solutions sounded the same: double down. A friend of mine drove me by his childhood home in Flint Michigan and every corner strip mall highlighted two products: lottery tickets and alcohol. His old home now had security bars around its first floor windows.

There are two obvious features about American inner cities and neither are talked about very much (see the NYT discussion, no mention). First, most have long and deep Democratic political rule. That is, not only the mayor, but the police chief, school superindendent, and every other head bureaucrat is a Democrat. Five of the 10 cities with the highest poverty rates (Detroit, Buffalo, St. Louis, Milwaukee, Philadelphia and Newark) have had a Democratic stranglehold since at least 1961, and most dangerous big US cities are strongly Democratic. Why isn't this relevant?

The other feature is these cities are predominantly black or Hispanic. Few can even mention this without being called a racist, and most important writers have legitimate reason to avoid even being accused of racism, which can cost you your career (meanwhile, Spencer Ackerman, who was caught red handed advocating the racist libel as a progressive strategy, has been unaffected, highlighting its potency). So, as a non-professional, I'll ask: Why are these minorities performing so poorly when concentrated?

Honest Italian-Americans ended up greatly benefiting from the collapse of the briefly-lived Italian American Civil Rights League in 1971. These were the people who would say with a straight face they didn't know what the word 'mafia' meant. With the danger of being accused of racism removed, the federal government during the Reagan Administration hammered the Mafia and left it a shell of what it once was. Since the Mafia preyed most of all on their co-ethnics, that was a huge win for Italian-Americans. This issue is not whether or not one group is more prone to nefariousness than any other. The issue is that if any group is exempted from criticism, the temptation for members of the group to do bad things increases. We all have urges that are worthy of criticism, but if we can arrange matters so nobody is allowed to criticize us, then the temptation to give in to those urges can be overpowering.

American minorities don't need money, pity, or special rights, they need temperance, diligence, thrift and other bourgeois virtues, exactly what their community leaders are telling them are orthogonal to their position. The last thing you should tell someone in really bad straights is that his problem is the indifference, if not cruelty, of others, because it doesn't help him.

Democrats and black leaders bear most of the blame for the Detroit, and this should be a teaching moment. Yet, I see no such re-evaluation, and so I have little hope for American Cities, which I assume in a generation will be like the favelas of Brazil, places the police won't even go.

Wednesday, March 30, 2011

The Advisor Weblog

The Advisor Weblog


Majors update for the US session

Posted: 30 Mar 2011 06:59 AM PDT

EUR/USD tug of war

Posted: 30 Mar 2011 05:27 AM PDT

EUR/USD remains trading in a limited 100 pips range since weekly opening, lacking past months strength yet unable to fall. Inflation, rate hikes and sovereign debt in the euro zone, growth and  comments regarding easing facilities in the US, keep investors on hold. Guess this Friday Payrolls can bring some light, yet a more clear picture will come with next week ECB decision. At this point, with market already pricing in a 0.50 bp rate hike, less than that will probably be quite disappointing.

In the mid time, pair is trading above a daily ascendant trend line, yet limited to the upside by a smaller one; 4 hours indicators are flat around their midlines giving no much of a clue, while 20 SMA holds a slightly bearish slope and price struggles around it. Technical confirmation above 1.4120/30 area, should see the pair higher, extending towards 1.4180/1.4200 price zone. Lose of 1.4050 on contrary, could lead to a retest of weekly low around 1.4000.

 


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Best pair to trade now: GBP/USD

Posted: 30 Mar 2011 03:31 AM PDT

Tuesday, March 29, 2011

'The Spread' is Absurd, So is Life

In college debate there's a strategy called 'speed and spread', where a speaker speed reads the broadest number of arguments possible in their allotted time. Watching high school and college debates use this, it seems absurd. The objective is to present the maximum number of arguments in a debate round, hoping that a few unrebutted points seem like concessions to judges. Quality and consistency, are not priorities. I suppose in debate the judges merely read the arguments, because it seems impossible to process these statements (see below).



I thought this was silly until I was in court. I was being accused of appropriating some unspecified intellectual property, and several intimations were made in the original complaint but they were not exhaustive. The problem is that litigation is very expensive (IP lawyers are $500/hour), and there's an opportunity cost because as long as you are accused of appropriating undescribed IP, no one with any money would dare hire or work with you. So, you want to get it done. However, they can say 'you took the idea of investing in low volatility stocks', and by the time you mention you did this at a prior job, they then say '...in a particular way', and add on several other items, such as the concept of 'mean variance optimization', etc. You can knock these down one by one, but the longer you play the more you lose.

The judge, meanwhile, looks at every allegation piecemeal, so that they aren't penalized for making absurd allegations, they just hope at least one remains viable. My lawyers then leveled some counter-arguments I found were irrelevant, but they noted you never know what arguments work, that is, which might resonate with the judge. Restricting one's counter-suite was suboptimal. Real life was an absurd spread debate I had to play.

I was reminded of this watching this testimony on how to reform the governmental housing system, and one Janneke Ratcliffe made several remarkable assertions, including that low-down payment mortgages on some subset of loans did above average over the past decade, implying to her that low down payments were not a problem. I'm sure there is such a subset of loans, but in the context of the fact that default rates are multidimensional this is unsurprising--you can find subets of fat men who are actually quite healthy, but on average at the margin obesity is not healthy. The point is, she made an assertion to some atypical finding, presented it as a fact that was dispositive of her assertion, and it sat out there as evidence because no one could, in the time presented, review and rebut it.

If you ever watch a speech by Noam Chomksy you'll note his discussion crosses political science, economics, sociology, history, and mentions several disparate facts in each of these domains. The key to being persuasive seems to be to have an argument that is irrefutable, because no fact is essential, and they are so disparate facts no one can refute a significant proportion of them definitively. That is, appearing to have a fusillade of facts is overwhelming. So, the big issue (eg, anarcho-syndicalism? Capitalism is evil?) is promoted via thousands of supporting facts. You don't have enough time, and no one has the breadth, to evaluate all of them, and merely refuting a finite subset leaves open the logical possibility he's correct on his big point.

If you look at debates about taxes, the stochastic discount factor, global warming, or whether the moon landings were faked, you'll find yourself unable to counter some point that helps the opposing view, reality has too many dimensions. The paper Fact-Free Learning explains this pretty well (AER, Dec 2005). The idea is that most 'facts' are really statements about relations between datapoints. As there are an infinite number of relational facts, you can’t expect to know them all even if you know all the basic data points, so certainly you can't easily rebut them all. So everyone knows only a different subset of the relations, which gives them different ‘facts’. There's no simple way to reconcile them, because there are so man facts, each supportive in their own way.

Any expert merely knows a lot of facts relevant to his prejudices, and it's not hard to make a case for anything, which is why a good lawyer always helps. It also explains why people don't converge on the truth, because once you are a valued advocate for X, the payoffs from others who like X are surely better than recognizing that X is, in fact, false (plus, presumably after so many years most of your friends and colleagues are X-lovers).

The Advisor Weblog

The Advisor Weblog


Best pair to trade now

Posted: 29 Mar 2011 04:30 AM PDT

Monday, March 28, 2011

CFPB to Start Big


A months-long internal investigation of 500 loan files by the Federal Reserve found no wrongful foreclosures, members of the Fed's Consumer Advisory Council said earlier this month. Zero out of 500. The Fed's report defined "wrongful foreclosures" as repossessions of borrowers' homes who were not significantly behind on their payments. But consumer advocates stated that didn't matter, because "That homeowners were not delinquent has never been our contention," said Rashmi Rangan, a member of the panel and the executive director of the Delaware Community Reinvestment Action Council. "Our contention is that many of these foreclosures were avoidable."

In other words, they could have written down the loan and kept the delinquent borrower in their homes. Heck, why require anyone to pay back their debts, just think of the Keynesian stimulus!

A new regulator, meanwhile, is not encumbered with lots of banking experts. The CFPB, Elizabeth Warren's new financial regulator, is excited to make a bang in home lending. A power point leaked to the HuffPost shows that the CFPA notes banks saved $20B by not applying 'special servicing of delinquent loans'. Presumably, given foreclosed loans were found to all be truly delinquent, this would merely add more signatures and busy work to what is a fact. Somehow, I don't see how adding costs to the intermediation process helps anyone, but that's why I'm not in charge.

The CFPB presentation notes that it could 'require 3.0 million principal reduction modifications over six months , exempting government FHA and VA loans. Why any private bank lends to homeowners any more is an interesting question. The CFPB notes 'servicers fund write-downs (make investors whole)', as if the problem with banks is they have too much money. That will really get the economy going.

With all the financial problems in the pipeline, I'm almost hoping the CFPB does something this bone-headed right out of the gate, because creating a big mess early is probably the best thing they can do. That is, if they did something subtle it would probably be worse because it would take longer to fester.

The Advisor Weblog

The Advisor Weblog


Dollar and Payrolls: what´s next

Posted: 28 Mar 2011 05:50 AM PDT

Since 2007, the US has suffered the worst crisis over a century, being the most affected, housing and employment sectors. Unemployment rate, back in the mid 2007 was of around 4.5%; since then, the uptrend continued to hit a multi-decade high of 10.2% in October 2009. Unemployment rate has been steady above 9.5%, surprisingly improving this year, falling to 8.9% for past February.


Ahead of March numbers to be release next Friday, market expectations are quite similar to previous month reading: market expects an unemployment rate of 8.9% while the economy is expected to add around 190K new jobs, same as previous month. An educated guess will say forecasters are not really sure what to expect right now; besides, and considering the fact QE life depends on employment situation, and due to recent hawkish comments from FED Plosser, and Bullard, the whole US/dollar situation could be strongly affected with this data.

Is well known QE depends on employment situation: a strong improvement in the numbers could change dollar long term bearish trend. Maybe the reaction won't be immediate. Yet if we add to the equation, more FED members comments following recent Plosser and Bullard ones, dollar could well be at the doors of a long term bullish momentum across the board; trigger will be an anticipated end of QE2 or even a not so at sight rate hike.

Also, with commodities near record highs and the ECB planning a new facility plan to give troubled euro zone banks liquidity, there is a good chance market will react favoring the greenback rather than following latest risk sentiment equation.

Again, this will depend on better than expected numbers, that is an unemployment rate below 8.9% and @ 200K new jobs added.

The other less probable picture, a quite negative reading with unemployment rate above 9.0% and less than 150K new jobs, should on contrary send investors back to sell the dollar, buy commodities, and bet on an euro zone rate hike. The FED will then need to do more than just jawboning, to convince market participants the economy has already gear up.


Sunday, March 27, 2011

Ambiguity Aversion and Panics

The rise in 'information sensitivity' across a broad cross-section of formerly informationally insensitive assets occurs due to fears of adverse selection, of buying an asset that is being sold because insiders know it is toxic. Yet it's interesting that when this occurs assets generally sell below their 'fair value' or 'net asset value' as they were in the winter of 2009, and people don't jump in and sieze this opportunity as they usually do.

Why the sudden risk aversion? Is it just because they are less wealthy? It's not clear less wealthy people are more risk averse than the more wealthy people. Is it just because they recently lost money? Consider the known fact that people would rather bet on future events than on past events of equal uncertainty, because not knowing what happened undermines competence. In experiments, a lottery ticket is worth a lot less after the drawing for most people even if they don't know what the true number is, and seemingly the seller does not either. People shy away from processes about which they think they have insufficient, as opposed to probabilistic, information, even if framed identically (eg, both with a 50% chance).

This 'ambiguity aversion' increases with the perception that others are more competent and more knowledgeable. If people choose an ambiguous option and receive a bad outcome, then they fear criticisms by others who will note they should have known better. Such criticisms are easier to counter after a pure risky choice, when a bad outcome is more easily explained as bad luck, than after an ambiguous choice. This explains the enhanced ambiguity aversion. Such social effects are called the fear of negative evaluation (FNE), basically, the fear of being evaluated a fool with hindsight.

If a bad outcome were to result from a prospect about which an agent had relatively little knowledge his failure can be blamed on his incompetence. A bad outcome resulting from a pure risky prospect, on the other hand, cannot be attributed to poor judgment. All possible information about the risky prospect was known, and a failure is simply bad luck. The key is, ex post, will you look like a sucker, or just unlucky? Investment managers can live with bad luck, but their reputation is essential and they can't be seen a fool.

Applied to the recent recession, consider that by the summer of 2008 we already had failures of Bear Stearns and Fannie Mae, two venerable institutions. It was not clear what the essence of the problem was--CDOs? Complexity? Banks? Mortgages? Copulas?--so investors simply knew that something was rotten, and it seem probable that some people knew what was going on, leaving one in the proverbial position of the guy at the poker table who doesn't know who the sucker is. This causes everyone to get alligator arms and jump into the least risky thing they can think of--the dollar, US Treasuries. With investment down, profits plummet, leading to a general recession.

A key point is that when spreads on Junk bond and Asset Backed Security spreads went well above any conceivable expected loss, we know it's a good time to invest because poor performance is never as bad as implied via risk-neutral probabilities, and it's better not to think of this as a 'risk premium' but rather an opportunity driven by people's ambiguity aversion.

Friday, March 25, 2011

The Advisor Weblog

The Advisor Weblog


Best pair to trade now: GBP/USD

Posted: 25 Mar 2011 04:05 AM PDT

Thursday, March 24, 2011

The Advisor Weblog

The Advisor Weblog


Gold set fresh record high, dollar falls

Posted: 24 Mar 2011 08:05 AM PDT

Gold continues its constant bullish long term ride accelerating after US opening, already up almost $ 10.00 since Wall Street opening. EUR/USD tests 1.4200, GBP/USD is back above 1.6200, while commodity currencies have just set fresh daily highs against greenback.

Oil is also strong holding above $ 106.00, while European and US indexes are gaining ground rapidly.Expect trend to continue today against poor dollar.


Majors hourly perspective for the US session

Posted: 24 Mar 2011 06:31 AM PDT

US Durable Goods Orders quite negative

Posted: 24 Mar 2011 05:36 AM PDT

US Durable Goods Orders come out quie negative, far below past month and forecast, printing -0.9%; core orders where also negative at -0.6%. Weekly unemployment claims improved, falling to 382K.

Dollar spiked lower against major rivals except for Pound that holds steady near daily low.


Best pair to trade now: EUR/USD

Posted: 24 Mar 2011 03:36 AM PDT

GBP/USD hit by Retail Sales

Posted: 24 Mar 2011 02:45 AM PDT

Bearish momentum in the cross accelerates after worse than expected UK Retail Sales, with price apporaching key support area 1.6130/40: pair has both, the 61.8% retracement of the latest bullish rally from 1.5982 to 1.6400 monthly high, and the 200 EMA in the 4 hours chart. Daily close below that area should point to a retest of the 1.5970 lows. Beware smaller time frames look extremely oversold, so we may see some limited bullish corrective movement/consolidation before next big run. Resistances now, come at 1.6200, and 1.6240.

 

 

 


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Euro down, bullish longer term trend still alive

Posted: 24 Mar 2011 12:40 AM PDT

If you ask me what currrent EUR/USD slide is, correction will come to my mind. the long term is barely unchanged in the daily chart,with indicators slightly lower yes, but far from pointing for a major movement. I have several trend supports in the way, first one a short term ascendant trend line arund 1.4020/30 the cross is about to challenge. Lose of that one today, could see the cross testing key 1.3950 static support area, and static Fibonacci support. Not seen for today yet below lies another daily ascendant trend line around 1.3870. Daily close below this last will no doubts jeopardize the bullish view.

Resistances short term talking lie at 1.4090 1.4140 and 1.4190.

 

 


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EUR/USD holds above 1.4100, bounces back higher

Posted: 23 Mar 2011 07:00 AM PDT

Euro seems to have found a bottom at least in the short term at key 1.4100 area, bouncing back higher also supported by quite disappointing US housing data. Pair needs now to regain and consolidate above 1.4160 to recover lost strength and attempt to reach 1.4220 area.