John At The Center

The solution comes in preventing booms from getting out of hand, and always letting recessions be hard enough to liquidate bad investments. We can’t do that now in the midst of the bust, but after the bad debts of our economy are liquidated, much as the Depression ended in 1941 when Debt/GDP reached 1.4x due to compromises and payoffs, and not due to the government or Fed, there can be real growth again, because less-indebted consumers and businesses are ready to act.

To Mr. Athreya, I would say that he has insufficiently embraced the complexity of the economy. It is so complex that reducing it to mathematics does not work well. But in a spirit of friendship, I invite him to visit me in Maryland and have lunch or dinner with me, at my expense. Maybe I will tell him the story of when I got to question the head of the Richmond Fed.

But I disagree with this: Blogging is more of a meritocracy than peer-reviewed journals. It more closely resembles “perfect competition.”

The experience of these guys’ don’t mirror the experience of the layman when reading all the stuff out there. What’s signal to professionals is noise to the layman and vice versa. And the truth (and merit) means different things depending on the audience

http://alephblog.com/2010/06/30/economics-is-hard-the-bad-assumptions-of-economists-makes-it-harder/

We can also use the underlying data for deeper analysis. For example, one might imagine trading on labor unrest by systematically shorting companies and their affiliates (supply chain, geography) where there are labor issues.

Finally, it might be quite compelling to try understanding what sequences of events lead to labor unrest in order to identify early signals or perhaps even learn how to induce unrest(!).

via Foxconn and Chinese Labor Issues | Recorded Future Blog.

Andrew Lo of MIT doing his riff on how physics envy can kill you – especially if you’re in finance/econ

via Physics Envy Can Kill You.

Financial information service Edgar Online, which had said for nearly a year now that it was looking for partnerships to boost its position in the XBRL data standard for financial reporting it pioneered, is buying XBRL software firm UBmatrix. In a statement, Edgar Online (NSDQ: EDGR) says the deal will combine its “position as the leading provider of (SEC) public company XBRL filings and XBRL data, and UBmatrix’s experience as the leading XBRL software provider to independent software vendors and major U.S. and international regulators.”

via Edgar Online Buys XBRL Software Firm UBmatrix | paidContent.

Lastly, I would recommend that you rarely believe quants when they boast that their signals are unique. The original ideas are sometimes brilliant, but a large majority of signals I’ve come across have been variations on a theme. Often, what makes a difference between a profitable signal and an unprofitable signal is not the actual signal itself but rather the technology with which you can implement it, the operational sophistication of the firm, the coding ability of its IT developers, and the culture of the team within which they work.

via God and RenTech’s black box | Analysis & Opinion |.

There is no evidence of worry over the threat of inflation in financial markets. To repeat a point that’s been made here many, many times, increasing interest rates too soon would be a mistake since it will make it more difficult for the economy to recover. If anything, given the weakness that still exists in the economy, more ease is called for.

via Economist’s View: Should Monetary Policy be More Expansionary?.

Chinese investment funds are tiptoeing into the U.S. stock market, raising their holdings of U.S. companies as they seek diversification from their volatile home market and see better prospects in the U.S. than elsewhere in the world.Securities filings show that Chinese funds that cater to individual investors have been allocating a larger share of their investments to the U.S. market in recent months. New entrants are also rolling out U.S.-focused investment products.

via Chinese Funds Venture Into U.S. Market – WSJ.com.

Oh, and one more point — not about El-Erian, but about quite a few policymakers and economists: the attempt to shift the discussion away from the short run is not, as often portrayed, an act of vision of courage. On the contrary, it’s an act of cowardice, an attempt to evade responsibility for a disastrous state of affairs that we could fix, but choose not to.

Keynes had it right:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

via In The Long Run, We Are Still All Dead – Paul Krugman Blog – NYTimes.com.

Today’s G-20 meeting has been advertised as a showdown between the U.S. and Europe over more spending “stimulus,” and so it is. But the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn.For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn’t turned out that way.[1keynes]Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along. The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab. So this would seem to be a good time to examine recent policy history and assess the results.

via The Keynesian Dead End – WSJ.com.

What benefit could there be to whomever is generating these extremely high quote rates? After thoughtful analysis, we can only think of one. Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion. We think it played an active role in the final drop on 5/6/2010, and urge everyone involved to take a look at what is going on. Our recommendation for a simple 50ms quote expiration rule would eliminate quote-stuffing and level the playing field without impacting legitimate trading.

via Flash Crash Analysis – May 6′th 2010 – Part 4 – Nanex.