John At The Center

Let’s start with the effects of this year’s deficit. … Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

via Economist’s View: Paul Krugman: Till Debt Does Its Part.

Bookstaber says the technology doesn’t matter.  And when he says that, he doesn’t have to model for it– and HFT will end (see bold):

For high frequency trading, the issues are not as simple. It is possible to construct a scenario for high frequency trading where a strategy is widely shared which has a reinforcing feedback and which pushes forward without anyone intervening. But I can construct such scenarios even without the need for millisecond trading. Not just construct such scenarios – I have seen them, and so have you, in any number of bubbles and crashes.

But speaking specifically about the risk due to high frequency trading, the risk of a cataclysm is constrained by the lack of feedback and lack of tight coupling. High frequency trading is a matter of individual trades – or possibly baskets of trades. It is not a process, much less a tightly coupled process. And while no doubt similar strategies are employed by many of the traders, if they are liquidity or information oriented, they are not going to be subject to reinforcing feedback. The sort of trading strategy that could be a problem is a trend following strategy with participants piling on in ever-increasing size. And, again, you don’t need a computer to have that occur.

I think the popularity of high frequency trading will end not with a bang but a whimper. As the field gets increasingly crowded, market impact will rise and opportunities will diminish. Day by day more and more of the high frequency traders will see small negative numbers rather than small positive numbers in their P&L columns. The nice thing about high frequency trading is that it doesn’t take long to know if a strategy is working or not. The trader gets many draws of his strategy every day. And there is no cost to closing a strategy down – often every position is set to zero at the end of the day.

via Rick Bookstaber: Not with a Bang but a Whimper – The Risk from High Frequency and Algorithmic Trading.

That is a big increase in repo lending. Greenspan used to look at repos as a proxy for hedge fund leverage. And when repo lending contracts, as it did in the crisis, it tends to do so across a wide range of collateral as banks increase haircuts, leading to synchronized downturns.

via naked capitalism: Party Time! Wall Street Back to Its Old Highly Levered Ways.

Some specific misunderstandings cause confusion about a possible “reset wave”:

1. Differing fixed terms mean hybrid ARMs reset over a 15+ year span in a less concentrated manner than projected.

2. Hybrid ARM resets currently often go down, not up.

3. Many ARMs due to reset or recast have been refinanced, modified, foreclosed, or paid from sale. This includes many POAs that recast well before schedule.

4. Where resets would increase the rates, lenders often just extend (or modify).

via The “Coming Alt-A Mortgage Reset Bomb” Is A Myth.

Many ARMs due to reset or recast have been refinanced, modified, foreclosed, or paid from sale. This includes many POAs that recast well before schedule.

via The “Coming Alt-A Mortgage Reset Bomb” Is A Myth.

CHICAGO — One of the biggest players in the hot area of high-frequency trading is one of the least known.

Getco LLC, a private company with fewer than 250 employees, often accounts for 10% to 20% of the daily trading volume of many U.S. stocks, the company has said, including highly traded names such as General Electric Co., Oracle Corp. and Google Inc.

Getco depends on the success of its proprietary complex algorithms to help it make money on the transactions more often than not. It also can pick up tiny rebates that some exchanges offer to firms willing to take the other side of trading orders. The company focuses on hiring top computer programmers and technicians, as well as traders.

via Meet Getco, High-Frequency Trade King – WSJ.com.

There’s a fine line between risk taking and risk ignoring. Bulls may be doing both.

All of this builds yet another case for the bears. The problem is that the market has not cared about any of it for weeks. John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”

via Dollar and Frothy Sentiment Are New Worries – Getting Technical – M. Kahn – Barrons.com.

Fatih Birol, the top economist at the International Energy Agency, to insist that we’ll reach the peak moment in 10 years, a decade sooner than most previous predictions (although a few ardent pessimists believe the moment of no return has already come and gone).

via Op-Ed Contributor – ‘Peak Oil’ Is a Waste of Energy – NYTimes.com.

It is easy to score rhetorical points pillorying newly re-appointed Fed Chair Ben Bernanke, but Stephen Roach makes the most reasoned “con” case in the FT today. He argues three points about the pre-Lehman incarnation of Bernanke:

1. He was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles.

2. He was the intellectual champion of the “global saving glut” defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia.

3. He is cut from the same market libertarian cloth that got the Fed into this mess.

via The Case Against Ben Bernanke.

Several studies have examined whether a manager having an MBA or CFA leads to superior portfolio performance. However, these studies have yielded mixed conclusions. A possible reason is that most have considered only MBA or CFA alone, and most have not controlled for managers’ style targets. We examine MBAs and CFAs together, controlling for market conditions and style targets. We find that the CFAs do add value, but even more significantly especially in light of events in recent months – CFAs reduce and MBAs increase Tracking Error.

via SSRN-Are You Smarter than a CFA’er? by Oguzhan Dincer, Russell Gregory-Allen, Hany A. Shawky.