Oh I do love to be beside the sea side

Willem Buiter took a month off from his FT blog, and I think I am going to follow that lead, so expect something in September. Meanwhile, here's some coastline.

This collateral smells a bit off

From Bloomberg:

The vaults of Credito Emiliano SpA hold the pungent gold prized by gourmands around the world -- 17,000 tons of parmesan cheese.

The regional bank accepts parmesan as collateral for loans... [its] two climate-controlled warehouses hold about 440,000 wheels worth 132M Euros...

The bank offers loans for as long as 24 months, equal to the time it takes the parmesan to age, at the euro interbank offered rate, plus 0.75-2%.

I love commodities finance. Particularly when you can eat the collateral if the loan goes bad.

Excess Liquidity

Ian Campbell, on breakingviews.com, has a nice statement of a view I have had for a while.

in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates "excess liquidity" - which may be feeding a new series of stock, commodity, property and bond bubbles...

Sebastian Becker, an economist with Deutsche Bank in Frankfurt, defines excess liquidity as money supply that is surplus to the needs of real economic activity, and therefore free to be invested in financial assets. Becker combines monetary growth figures for the US, Japan, the eurozone, the UK and Canada and finds excess liquidity - measured as a rising stock of money to GDP - in these economies is now being created more rapidly than in the late 1990s stock-market bubble, or during the subsequent house price boom.

Excess liquidity is a really hard thing to estimate, as it is the difference between two really big numbers: the supply of money, and the economy's demand for money. But this really is a Goldilocks situation: you want the money supply to be just right for economic needs. If, perhaps because you are worried about the banking system's access to liquidity, you supply too much, then it is just going to be invested in financial assets, creating a bubble. Are we, I wonder, in the early phases of the first post Crunch bubble?

Monoline Death Watch

Felix Salmon discusses some recent JPM research on MBIA:

in a note issued this morning they said that MBIA’s tangible book value is actually negative, to the tune of about -$40 per share.

OK, the full article has some caveats. But the mere fact that a reputable investment bank (if that is not an oxymoron) can suggest that MBIA is insolvent should raise some warning signs about the extended historical fiction that is insurance accounting.

Reasons to stay flat?

From Morgan Stanley. I find this a reasonable one slide account of where the equity markets are, but that's just a personal take.

Controlling complex systems

From an entirely different context, a rather useful metaphor for what happens when you get the rules of the system right:

attempts at self-control result in a competition between independent processes and that the amount of top-down control biases the competition appropriately

I am increasingly of the view that neuroscience has more useful things to say to finance than conventional economics does.

Inefficient Units of Currency

By Joseph Streckert, from the Canadian literary magazine McSweeney's:

• Children
  
• Millstones
  
• Imaginary euros*
  
• Copies of Now That's What I Call Music! Vol. 7**
  
• Pieces of long-grain rice that are not actually very long
  
• Unicorn heads
  
• Canadian dollars

*Arguably, the ECU (which worked perfectly well as a currency) was imaginary.

**Vol. 7 is I suspect now a collector's item. The current volume is 73.

The notable glibness with which the writer throws off chains of causation

I have nothing to say, really, I just wanted to repeat a lovely phrase from the comments to the post before last.

Things here will be slow and less finance-oriented here for a little while for two reasons: firstly, I have been intending to move this blog away from blogger for some time, and I really want time to look into that. Secondly, the spectacle of the utter failure of reform is depressing me slightly, if not causing a Touretteish Torrent.

Creativity

A lovely rant from Jenny Diski on the LRB blog:

... I’m left wondering what the word ‘creative’ means to people who can overcome difficulty by just being creative. It seems to be like an ingredient that’s available down the shops. If it’s necessary, you’ll get some and use it. Need to produce something? ‘Oh, just think creatively.’ I want to say, how do you think creatively? What is thinking creatively? But I don’t want to let on that I’m ignorant of a process everyone else seems to understand perfectly.

It’s a word I’ve never been able to use because I don’t know what it means really. Creative writing? As opposed to? Does it mean imaginative? OK, now imagination is called for. Right, there you go. How confident everyone seems to be about having the ability to be creative, and knowing what to do with it, and how very little effect it seems to have on the vast majority of products it is sprinkled on.

I especially like `Creative writing? As opposed to?'

Deprogramming Obama

A nice slant from Salon: the president is a prisoner of the cult of neoliberalism.

Don't judge me

Paul Krugman has a post entitled Rewarding bad actors. He takes the view that two situations - the profits from high frequency trading at Goldman (and presumably elsewhere) and the payout to Andrew Hall at Citi's Philbro arm - are undesireable. The common thread, he says, is

in both cases we’re looking at huge payouts by firms that were major recipients of federal aid... What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks

Now, I happen to agree with Krugman that both of these situations suck. However, I think his characterisation of the problem is wrong. He says.

we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer

In other words, the problem is bad people. That's too easy. It allows us to point out fingers and take no responsibility. No, the problem isn't evil people. The problem is that we have created a system where unhelpful actions are rewarded. It is the system that is at fault, not the actors. This means that many people are responsible: everyone who failed to promote or support change, and all of those who shaped and defended the current system. Yes, that does include me. But at least I am trying to promote a debate about what rules we need for the future.

Come backs

Just don't do it. That's surely the lesson we learn from sporting comebacks. Lance could only manage third in the TdF - a creditable showing, but hardly the position he was used to. With luck, Michael Schumacher will be similarly unable to reprise his form of years gone bye. As Kevin Mitchell wrote in Sunday's Observer, come backs make for a compelling spectacle, albeit one that is often not to the credit of the protagonist. Perhaps Damon Hill, who Schumacher pushed off the track in one of the worst display's of unsportmanlike behaviour I have ever seen, will enjoy next weekend's schadenfreude. The rest of us should just contemplate a modern memento mori. When it's time to go, just go.

Discrete, discreet trading

One of the things I was concerned with many moons ago is the difference between the types of behaviours you can get in discrete and continuous time. Continuous functions are funky beyond belief, and the less you have to reason about them, generally the better. (For a sample of some of the pathologies, see this book.) Therefore I was particularly interested to read a suggestion by Michael Wellman on making equity trading safer (and, by disallowing order sniffing robots, more discreet) by making it, well, more discrete. Here's the idea: Wellman suggests

a discrete-time market mechanism (technically, a call market), where orders are received continuously but clear only at periodic intervals. The interval could be quite short--say, one second--or aggregate over longer times--five or ten seconds, or a minute. Orders accumulate over the interval, with no information about the order book available to any trading party. At the end of the period, the market clears at a uniform price, traders are notified, and the clearing price becomes public knowledge. Unmatched orders may expire or be retained at the discretion of the submitting traders.

This is really a nice idea. Real users would notice no difference between a market discretised in ten second blocks and a continuous one, but at a stroke bad high frequency trading would be eliminated. Add in a minimum (but low) bid/offer spread too, and the system becomes significantly more robust. The high frequency traders can no longer take your money off the table.