The tricky lie of the state

During the past 10 years, countries have issued debt at outrageously low interests. This has made states lazy, overconfident on debt to finance conventional payments. Now, default risks are going up all over the board and financing is more expensive.

States, especially Western ones, who have become dependent on debt, now see how there is no other possible income source to finance the way out of the crisis, and expenses keep piling up. Once they relied on debt, they have taken care of a lot of redundant and questionable expenses that are now in the same bag as the functional and basic operational expenses that account for the services the state has to give its citizens. However, this bag is like a pudding, everything is mixed. Every budgetary expense is going to raise turmoil if cut, since there will always be a mouth fed by some dysfunctional social policy, somebody used to cheap subsidies, addicted to some outrageous political promise.

I attended an occupy meeting in an unknown European city attended by unlikely members. They were unemployed, and apparently had suffer from a poor education. A school teacher who was sacked claimed the government was on strike because it has stopped "feeding the citizens" with rights. Absolutely dumb! They even went into raising funds for something that apparently happened in Peru (???) !!! I was outraged. In which world did those people live? Of course, they had their iPhones.

People has lost the contact with reality, if they ever had any. People should learn to pay whatever services they want with their taxes, not by selling debt and promise to pay it in the future. To raise taxes one needs industry, and people should learn that they lost every bit of manufacturing to China, where their iPhone comes from, where they earn a slave salary, the salary that their will converge to. People should learn that the State cannot make up to the industry loss. A job made to fulfill a new law does not compensate a manufacturing job lost to cheaper hands. The state needs to pay for that and it can only be done with new debt issues.

So, next time you meet some gimme-right character, you tell him to
SHUT HIS MOUTH AND FUCKING READ SOMETHING IMPORTANT

Ohh by the way, screw the the clown game called olympic games (intentional lower-case).

Economic cycles

From Mr. Hui's Humble Student of the Markets, this piece got me thinking.

The financial cycle is turning down. Ray Dalio of Bridgewater explained the financial cycle using the Monopoly® game as an analogy in this note. 

If you understand the game of Monopoly®, you can pretty well understand credit and economic cycles. Early in the game of Monopoly®, people have a lot of cash and few hotels, and it pays to convert cash into hotels. Those who have more hotels make more money. Seeing this, people tend to convert as much cash as possible into property in order to profit from making other players give them cash. So as the game progresses, more hotels are acquired, which creates more need for cash (to pay the bills of landing on someone else’s property with lots of hotels on it) at the same time as many folks have run down their cash to buy hotels. When they are caught needing cash, they are forced to sell their hotels at discounted prices. So early in the game, “property is king” and later in the game, “cash is king.” Those who are best at playing the game understand how to hold the right mix of property and cash, as this right mix changes.

It is curious that in the markets the individual needs to do the opposite to the masses. It seems artificial and counter-natural.

In 2007, Spanish Banco Santander (SAN) financed the purchase of the Dutch ABN Amro by selling convertible bonds to credulous investors. The convertibility into common shares was due to September (or October or November, I don't remember very well, and I lost the source, sorry). It seems that most of the investors have waited for the convertibility and have not liquidated their positions. My point is that, even though not even the analysts of SAN knew what was coming, they had predicted a low cycle for late 2012, and the offer was to convert the bonds into shares for that date, when they expected the share price to be really low (at a little over EUR4), while the average investor extrapolated the 2007 price of more than EUR14. It seemed like a good deal. A smart bunch of motherfuckers they are.

We would do very well in spending some time with our kids playing these kind of games. The concepts are learned deep in our neural systems and they will be able to extrapolate when they grow up. This way, they won't end up becoming cheap financing sources for big banks.

Derivatives, too much to digest

Wow too much work (and too little salary), I just hope it brings fruit, because it promises to be big!

I now have one of the most powerful classification methods of the statistical literature. Anyone has any sports/poker model that can be cast into a decision/classification poblem? My algorithm will get the most the data can offer. If interested we go 50/50. Email me.

Anyway, let's cut to the chase.

I don't usually read antichrist prophets, but I like to enjoy myself with some really pessimistic and apocalyptic views that Alex Jones, Lindsey Williams and the like offer. I don't do Fulford... I can't explain what's with that guy.

Here's a piece from William's site:

Emergency update JP Morgan $2 billion loss May 2012 The Banks are all broke, they aren't going broke. Banks don't need money to spend money, they just use credit based on derivatives they they have marked in there books as being worth something. It's all off the counter. The US is broke, does that stop the US from starting more wars? They have credit. The game ends when the debts are called in, but everybody has a gun to everybody's head. Nobody dares to pull the trigger.

 Whatever you might think of the guy, you have to admit that is true.

I believe banks will be the last companies to fall. They will merge, the little ones may go bankrupt and bought by the usual suspects for a penny, but in the end, everybody will fall. Big brother is just too big nowadays, people can't rely on their local industries, a resort to paper currency is basic. Paper currencies will fall, but they will drag the entire Western civilization with them, and maybe the world.

Dark pools, algorithms and HFT

I found an interesting piece at ZH that I want to maintain in this blog. It is from this just-released book

Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System 

 Enjoy:

In early December 2009, Haim Bodek finally solved the riddle of the stock-trading problem that was killing Trading Machines, the high-frequency firm he’d help launch in 2007. The former Goldman Sachs and UBS trader was attending a party in New York City sponsored by a computer-driven trading venue. He’d been complaining for months to the venue about all the bad trades—the runaway prices, the fees—that were bleeding his firm dry. But he’d gotten little help.
At the bar, he cornered a representative of the firm and pushed for answers. The rep asked Bodek what order types he’d been using to buy and sell stocks. Bodek told him Trading Machines used limit orders.
The rep smirked and took a sip of his drink. “You can’t use those,” he told Bodek.
“Why not?”
“You have to use other orders. Those limit orders are going to get run over.”
“But that’s what everyone uses,” Bodek said, incredulous. “That’s what Schwab uses.”
“I know. You shouldn’t.”
As the rep started to explain undocumented features about how limit orders were treated inside the venue’s matching engine, Bodek started to scribble an order on a napkin, detailing how it worked. “You’re fucked in that case?” he said, shoving the napkin at the guy.
“Yeah.”
He scribbled another. “You’re fucked in that case?” “Yeah.”
“Are you telling me you’re fucked in every case?” “Yeah.”
“Why are you telling me this?”
“We want you to turn us back on again,” the rep replied. “You see, you don’t have a bug.”
Bodek’s jaw dropped. He’d suspected something was going on in- side the market that was killing his trades, that it wasn’t a bug, but it had been only a vague suspicion with little proof.
“I’ll show you how it works.”
The rep told Bodek about the kind of orders he should use— orders that wouldn’t get abused like the plain vanilla limit orders; orders that seemed to Bodek specifically designed to abuse the limit orders by exploiting complex loopholes in the market’s plumbing. The orders Bodek had been using were child’s play, simple declarative sentences sent to exchanges such as “Buy up to $20.” These new order types were compound sentences, with multiple clauses, virtually Faulknerian in their rambling complexity.
The end result, however, was simple: Everyday investors and even sophisticated firms like Trading Machines were buying stocks for a slightly higher price than they should, and selling for a slightly lower price and paying billions in “take” fees along the way.

A trading idea (wheat/corn)

I observe with incredulity the widened gap between what and corn. I have already commented what I see as a statistical arbitrage opportunity when this gap was 80. Today, with wheat @ USD770 and corn @ USD645, the gap stands at a good USD115. At this stage, I would go all in.

Latest Madmax world preacher, Dr. Burry

I believe things are eventually going to get out of control. Failing to see the fact that solving debt issues with more debt, that it is debt what has brought us here, that the economy of the last 41 years has been a credit doped economy and that the economy of the past 80 years has been fueled by cheap oil prevents people from reacting accordingly and logically.

The human mind extrapolates linearly and you believe that your standard of living is the natural state of the world. The titanic industry that underlies everything is hidden from you and a tapestry of made-up rights is put in front of you to block any sight of what really matters. Taking for granted is encouraged everywhere.

When somebody like Dr. Burry suggest you get gold and farmland, you should do it. For that matter, you should also get firearms.

The second video is more directed at system followers, though it is also inspiring.