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Fishtailing into the Future


The opening chapters of Michael Lewis’s new book, The Fifth Risk, detail the carelessness of the Trump transition team in the months leading up to his swearing-in as president. Former New Jersey governor Chris Christie led the team, with its binders full of possible agency chiefs, before he was summarily canned by Steve Bannon, who would be dumped soon himself by the ascending Golden Golem of Greatness. There was, in fact, a set of rigorous protocols for managing the transition of power based on decades of cumulative practice — and anxiety over the frightening nuclear demons at the core of US power — and they were disdained, to the horror of the permanent bureaucracy waiting in place for leadership.

In those months after the election, Mr. Trump was apparently dazed and confused by his unexpected victory, and completely unprepared to actually run the country. His super-sized “stable genius” brain surveyed the scene and his field-of-view saw nothing but swamp from sea to shining sea, populated by lizards, snakes, raptors, and poisonous insects, with higher-order mammalian predators in the C-suites. When he finally caught on to the game being played, Mr. Trump rounded up his own menagerie of crispy critters and sent them forth to run operations like the Department of Energy — in that case, former Texas governor Rick Perry, who knew next-to-nothing about the department’s responsibilities, and had sworn to abolish it in the primary elections (when he remembered it existed).

The politics around these deadly serious matters are interesting enough, and Michael Lewis, as always, excels at unpacking the fraught mysteries of highly complicated systems run by comically limited humans. But something else emerges from this story, perhaps unintentionally: that the complexities of government are now hopelessly unmanageable, no matter who is in charge of them, and that the actual path of this still-growing complexity leads to criticality and collapse.

…click on the above link to read the rest of the article…

The Crash Of ’87 Remembered: “It Was Clear The Acapulco Cliff-Dive Was On For Monday”

The Crash Of ’87 Remembered: “It Was Clear The Acapulco Cliff-Dive Was On For Monday”

“The markets in a panic are like a country during a coup, and seen in retrospect that is how they were that day,” wrote a young Salomon bond salesmena named Michael Lewis, of the chaos he witnessed. “One small group of people with its old, established way of looking at the world is hustled from its seat of power.”

As Bloomberg details, most of the people willing to share their memories count themselves as winners who seized the moment as an opportunity not only to make money, but also to insert themselves in the new financial order – Paul Tudor Jones, Stanley Druckenmiller, Nassim Nicholas Taleb. Their story, and the story of Black Monday, is the birth story of modern financial markets – a wild ride of shock, angst, and, for some, glory.

In the weeks before Black Monday, a few investors spotted patterns that gave them pause.

he most confident were Paul Tudor Jones and Peter Borish, young partners at a small hedge fund in Lower Manhattan. In a prescient Sept. 24 note to investors, Jones even signed off with “caveat emptor” – buyer beware.

 

PETER BORISH, head of research at Tudor Investment Corp. and Paul Tudor Jones’s No. 2:

We were tracking exponential moves in the equity market. The main one was the equity move in the 1920s, and the market in 1987 looked almost identical. The week before Black Monday, the technical and fundamentals aligned, and so we thought Monday would be the day.

ALLAN ROGERS, head of government bond trading at Bankers Trust Co.:

…click on the above link to read the rest of the article…

Former Fed Advisor Asks “Has The Fed Bankrupted The Nation”

Former Fed Advisor Asks “Has The Fed Bankrupted The Nation”

Volcker, Greenspan, Bernanke and Yellen.

Which one does not belong? Logic dictates that Volcker should have been odd man out. After all, there is no legendary “Volcker Put.”

The towering monetarist made no bones about never being bound by the financial markets. The same can certainly not be said of his three successors. And yet, history contrarily suggests it is to Volcker above all others that the financial markets will forever be beholden.

Many of you will be familiar with Michael Lewis’ memoir, Liar’s Poker. Yours truly first read the book in a Wall Street training program much like the one Lewis survived to describe in his autobiographical work. The take-away then, in late 1996, was that Gordon Gekko was right — greed was good.

Recently, a second reading of Liar’s Poker, following nearly a decade inside the Federal Reserve, delivered a much different message than did that first youthful reading and was nothing short of an epiphany: Paul Volcker, albeit certainly inadvertently, created the bond market.

On Saturday, October 6, 1979. Volcker held a press conference and announced that interest rates would no longer be fixed and that further the Fed would begin to target the money supply in order to curb inflation and “speculative excesses in financial, foreign exchange and commodity markets.”

Alas, this new regime was not meant to be. In trying to introduce an alternative to interest rate targeting, the Fed replaced one guessing game with another. Predicting the demand for reserves and then buying or selling securities based on that demand proved to be just as dicey as a similar exercise to target a given level of interest rates had been.

…click on the above link to read the rest of the article…

Betting on the Wall Street Crash

Betting on the Wall Street Crash


If you read Michael Lewis’s book The Big Short or see the movie by the same name, you won’t find much about how the financial crisis of 2008 was set in motion more than two decades earlier. You won’t learn much about the roles of Ronald Reagan and his disdain for big government or about Bill Clinton’s faith in neo-liberalism, trusting that the modern markets and the supposedly sophisticated investors would keep excesses in check.

Nor will you find much about economist-turned-politician Phil Gramm who incorporated many of Reagan’s and Clinton’s beliefs into legislative actions, slashing taxes on the rich in the 1980s (and thus incentivizing greed) and, in the 1990s, brushing aside Franklin Roosevelt’s painfully learned lessons from the Great Depression about the need for firewalls between the speculation of Wall Street and the hard-earned savings of Main Street.

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Also out of Lewis’s narrative frame is Brooksley Born, the federal commodities regulator who foresaw the looming danger from the exotic new financial instruments that sliced and diced risky subprime mortgages and packaged them in bonds with ratings far above what they deserved – and the even riskier tendency to lay bets on how the bonds would perform.

But Born was out-muscled by bigger financial stars with larger egos, the esteemed Federal Reserve Chairman Alan Greenspan (originally a Reagan appointee) and Clinton’s brash Deputy Treasury Secretary Lawrence Summers, a rising star in the neo-liberal establishment which treated the market’s “invisible hand” as a new-age god.

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The Big Short is a Great Movie, But…

The Big Short is a Great Movie, But…

 

Paris — Michael Lewis is the chronicler of Wall Street.  He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling.  Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010).  Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.

The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life.  Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining.  Lewis does this with two essential ingredients of any film: a simple story and compelling characters.

Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking.  Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion.  Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.

…click on the above link to read the rest of the article…

“Fed Policy Is Toxic,” Michael Burry Warns “The Little Guy Will Pay” For The Next Crisis

“Fed Policy Is Toxic,” Michael Burry Warns “The Little Guy Will Pay” For The Next Crisis

As NYMag.com reports, in an email, which readers of the book will recognize as his preferred method of communication, the real-life head of Scion Asset Management answered some of questions about the state of the financial system, his ominous-sounding water trade, and what, if anything, we can feel hopeful about…

The movie portrays all of you as kind of swashbuckling heroes in some ways, but McKay suggested to me that you were very troubled by what happened. Is that the case? 

I felt I was watching a plane crash. I actually had that dream again and again. I knew what was happening, but there was nothing I, or anyone else, could do to stop it. The last day of 2007, I couldn’t come home. I was in the office till late at night, I couldn’t calm down. I wrote my wife an email and just said, “I can’t come home; it’s just too upsetting what’s happening, and I didn’t want to come home to my kids like this.” As for punishment of those responsible, borrowers were punished for their overindulgences — they lost homes and lives. Let’s not forget that. But the executives at the lenders simply got rich.

Were you surprised no one went to jail?

I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco peninsula.

…click on the above link to read the rest of the article…

The Big Short–A Review

THE BIG SHORT – A REVIEW

“The truth is like poetry, and most people fucking hate poetry.”

The Big Short opens nationwide today. But it happened to have one showing last night at a theater near me. My youngest son and I hopped in the car and went to see it. I loved the book by Michael Lewis. The cast assembled for the movie was top notch, but having the director of Anchorman and Talledaga Nights handle a subject matter like high finance seemed odd.

The choice of Adam McKay as director turned out to be brilliant. The question was how do you make a movie about the housing market, mortgage backed securities, collateralized debt obligations, collateralized debt swaps, and synthetic CDOs interesting for the average person. He succeeded beyond all expectations.

Interweaving pop culture icons, music, symbols of materialism, and unforgettable characters, McKay has created a masterpiece about the greed, stupidity, hubris, and arrogance of Wall Street bankers gone wild. He captures the idiocy and complete capture of the rating agencies (S&P, Moodys). He reveals the ineptitude and dysfunction of the SEC, where the goal of these regulators was to get a high paying job with banks they were supposed to regulate. He skewers the faux financial journalists at the Wall Street Journal who didn’t want to rock the boat with the truth about the greatest fraud ever committed.

What makes the movie great are the characters, their motivations, their frustrations, their anger at a warped demented system, and ultimately their hollow victory when the entire edifice of fraud came crashing down on the heads of honest hard working Americans. The movie does not glorify the men that ended up making billions from the demise of the housing bubble. But it clearly defines the real bad guys.

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“Facts Do Not Cease To Exist Because They Are Ignored”

“Facts Do Not Cease To Exist Because They Are Ignored”

Courage

“The kid had a 94-mile-per-hour fastball, a clean delivery, and a body that looked as if it had been created to wear a baseball uniform. He was, in short, precisely the kind of pitcher Billy thought he had trained his scouting department to avoid.”

– Michael Lewis, Moneyball

In his book Moneyball, Michael Lewis explores the irrationality and ignorance of human behavior and the opportunities it creates for those willing to resist it. The book represents a value investors guide to how the Oakland A’s, with one of the smallest budgets in Major League Baseball, consistently found and acquired quality players that were shunned under the traditional scouting matrix. These overlooked and undervalued players afforded the Oakland A’s and General Manager Billy Beane the fifth best winning percentage with the fourth lowest total payroll over the last 15 years. As the graph below from FiveThirtyEight shows, Beane dramatically outperformed his opponents when it came to maximizing the value of his budget.

Once when asked why he was willing to allow Michael Lewis to write a book about his approach, Beane responded “It won’t matter who reads it, no one would have the courage to put into practice what we do.” This same model of logic and courage should be applied in investing.

…click on the above link to read the rest of the article…

 

 

How HFT Destroys Markets: 50 Pages Of Evidence

How HFT Destroys Markets: 50 Pages Of Evidence

Back in 2009, when aside from a few insiders, nobody had heard of HFT, Zero Hedge launched its crusade to expose the algorithmic scourge that has since then caused an equity, treasury and now US Dollar flash crash, and has been the subject of a Michael Lewis bestseller and resulted in countless market halts and failures.

More importantly, there is now roughly 50 pages of just bibliography citing the evidence-based, academic research that has shown just how pervasively, maliciously and premeditatedly HFTs manipulate, destabilize, impair and otherwise destroy every single market in which they participate, and what’s worse: result in incremental costs to investors, debunking the biggest lie HFTs spread about themselves – that they, being the gregarious humanist vacuum tubes they are, make trading cheaper and more accessible for the small investor.

And the biggest paradox: despite all this proof – which we urge every readers to sent to their favorite SEC regulator – America’s corrupt enforcers of securities laws continue to turn a blind eye to all the crime that takes place every single day. Why? Because they collect a portion of the proceeds, of course, and because they need a scapegoat to blame once the market crashes.

We are grateful to “R. T. Leuchtkafer” who put it all together.

 

…click on the above link to read the rest of the article…

Troy Will Burn – the Big Deal about Big Data

Troy Will Burn – the Big Deal about Big Data

I know, I know … I’m a broken record and a Cassandra, with 2 successive notes on Big Data. But I don’t care. This is a much larger structural risk for markets and investors than HFT and the whole Flash Boys brouhaha, it’s just totally under the radar and hasn’t surfaced yet. And unfortunately, just as I think Jeb Bush speaks for most Americans – Democrat and Republican alike – when he says that he doesn’t get what all the fuss is about when it comes to metadata collection and Big Data technologies, so do I think that most investors – institutional and individual alike – are blithely unaware of how their market identities can be stolen and their market behaviors influenced, all in plain sight. 

Jeb Bush should know better. I think he probably does. Investors may not know better yet, but they will soon, one way or another. As you read this note, a small group of hedge fund managers are doing to you exactly what the NSA is doing to “terrorists”.

Today a handful of governments use Big Data to identify individual behavioral patterns so that certain individuals can be killed. Today a handful of hedge funds use Big Data to identify investor behavioral patterns so that certain investors can be crushed. Today Big Data is primarily an instrument of social information gathering, with a powerful but punctuated impact on those individuals on the receiving end of a drone strike or a targeted trade.

…click on the above link to read the rest of the article…

 

 

Michael Lewis Reflects on His Book Flash Boys, a Year After It Shook Wall Street to Its Core

Michael Lewis Reflects on His Book Flash Boys, a Year After It Shook Wall Street to Its Core

When I sat down to write Flash Boys, in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street. I was far more interested in the characters and the situation in which they found themselves. Led by an obscure 35-year-old trader at the Royal Bank of Canada named Brad Katsuyama, they were all well-regarded professionals in the U.S. stock market. The situation was that they no longer understood that market. And their ignorance was forgivable. It would have been difficult to find anyone, circa 2009, able to give you an honest account of the inner workings of the American stock market—by then fully automated, spectacularly fragmented, and complicated beyond belief by possibly well-intentioned regulators and less well-intentioned insiders. That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?

By the time I met my characters they’d already spent several years trying to answer those questions. In the end they figured out that the complexity, though it may have arisen innocently enough, served the interest of financial intermediaries rather than the investors and corporations the market is meant to serve. It had enabled a massive amount of predatory trading and had institutionalized a systemic and totally unnecessary unfairness in the market and, in the bargain, rendered it less stable and more prone to flash crashes and outages and other unhappy events. Having understood the problems, Katsuyama and his colleagues had set out not to exploit them but to repair them. That, too, I thought was interesting: some people on Wall Street wanted to fix something, even if it meant less money for Wall Street, and for them personally.

 

…click on the above link to read the rest of the article…

We’ll Meet Again, Don’t Know Where, Don’t Know When

We’ll Meet Again, Don’t Know Where, Don’t Know When

I was having a post-Departmental Colloquium dinner with a small group of colleagues from the Harvard Chemistry Department in the Spring of 2008 when the subject turned to the then-recent shudderings of the stock market – a topic which at the time was of greater concern than usual but about which none of us actually knew anything at all. One of my colleagues (in fact our host) was an elderly professor with wisps of white hair and mildly expressed yet utterly inflexible opinions—a legitimately brilliant scientist whose certainty, alas, seemed to extended beyond his expertise. He was, in my mind, a model of the reflexively liberal, raised-on-the-Gospel-of-Saint-Krugman scientist that abounds at Harvard and in academia in general. And, despite a recent drop in the Dow Jones Industrial Average on the order of 10%, the professor dismissed any serious worry, suggesting that the ups and downs of the market were just meaningless tides of funny money.

“Rob” I said (not his real name), “I am sympathetic about that. And I too get the feeling that all these billions of created and lost dollars don’t seem to actually make a difference in our lives. But the Wall Street people are sounding a little more frantic than usual these days. They’re talking as though this time it’s really going to matter.”

Of course, the Wall Street people, as it turns out, were quite right, as the market dropped another 20% over the course of a few days in June and then (just to show they weren’t kidding) another 20% or so over the ensuing half year—taking with it down the rabbit hole around $11 billion of Harvard’s endowment. And, just to be explicit, because Harvard ran a substantial portion of its operation on interest from the endowment, that meant that building and hiring freezes, salary cuts, early retirement, and various other features of austerity weighed heavily on the Ivory Tower for quite a while. These days, I understand that Harvard has gone back to burying their money in an environmentally friendly tin can in the back yard, which might be about the only place that it is going to be safe this year.

…click on the above link to read the rest of the article…

 

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