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I’m trying to do retrospectives on financial predictions as I stumble across them on the Web. Here’s one that turned out correct: @EpicureanDeal said not to buy Blackstone Group when it went public.

"A little knowledge is a dangerous thing." Like, say, a little knowledge of cool and funky rich people or private equity deals from the paper. I’d rather be financially illiterate than taken hold of this bag.

From 35, to 25, to 15, to 5. Since the market bottom $BX has quintupled which is basically in line with the S&P.

Correlation since 2008 of the S&P to $BX has been 95%, so you can rule out a “complementary growth” argument for the buy.

Reproducible analysis:

require(quantmod)
getSymbols("BX")
chartSeries(BX)
reChart(up.col='yellow', dn.col='light blue', color.vol=FALSE)
getSymbols("SPY")
chartSeries(BX/SPY)         #quantmod automatically matches subsets for you!
reChart(up.col='yellow', dn.col='light blue', color.vol=FALSE)
bx <- BX['2008:']
sp <- SPY['2008:']
cor(bx,sp)










An Insider’s Perspective on the Basel Reforms (por stanfordbusiness)

  • regulatory framework contributed to market uncertainty over distresed banks
  • worried about transmitting financial distress to real economy
  • reduce procyclicality
  • focus on interconnectedness
  • trying really hard not to screw things up worse
  • trying to avoid unintended conequences … although some consequences were intended
  • common equity may be the only thing that really matters
  • didn’t intend Basel II to incent hybrid capital
  • even though Basel III didn’t increase capital requirement ratios much, it did increase the required capital simply by redefining risk
  • distressed banks, in order to save face, were paying dividends and buying back shares—blowing out their capital base—because if they conserved like they needed to, the market would smell blood and eat them
  • prior to the crisis of 2008, even regulators weren’t clear on why capital requirements were necessary or what capital actually meant
  • "tie our own hands"
  • countercyclical buffer
  • capital conservation is no longer about solvency or market perceptions: it’s about having enough capital to withstand a period of market stress and still being solvent even during the duress
  • "to state the obvious, we can’t know what «the capital level at which the firm would be viewed as viable by the market»"
  • trying to find a real-world 99% confidence interval for firm failure
  • (not easy, since probability doesn’t exist)
  • empirical 99% risk-weighted loss
    image
  • "eye of the beholder"
  • "leap of faith" (#econometrics)
  • "translating fun things like economics into real things like accounting is challenging"
  • only have Basel I and Basel II risk classifications, can’t find out what Basel III risk-weighting will be
  • requires a lot of “judgement” (I could think of a less nice word for that)
  • We have never seen the market’s worst because the Federal Reserve stepped in in 2008—so we really don’t know the most catastrophic case that banks might self-insure at.
  • Basel III requires 4.5% minimum capital ratio (Basel I was 4%-6%). “How did we get the half percent? Having sat in the room the whole time I’m still not sure how we got a half percent.”)
  • …plus Capital Buffer 2.5%
  • …plus Counteryclical Buffer up to 2.5%

Audience questions

  • Evan Pico, $C: Why assume wholesale credit can go all the way to zero?
  • "We’re trying to assume something worse than history could happen.”
  • The Basel Committee bases its rules not on the firms that did OK in the crisis but on failed banks—which if they weren’t acquired would have failed even harder—and on what might have happened if X,Y,Z hadn’t saved our arses as much as they did. Worst case scenario.
  • observation period
  • Mimi Mangus, Union Bank: QIS template. We don’t have the data to calculate LCR or NSFR. So it seems like you’re analysing B.S. Are we supposed to pay money to answer your questions?
  • MM: “Regional banks don’t have 100% Liquidity Coverage Ratio like Goldman. We hold a lot of GSE’s, MBS, and traditional loans. Maybe we need to replace Fannie and Freddie with a member-bank mutual.” Comparison of US to Australia.
  • "We want collateral to be liquid both in private markets and through the central bank."
  • "I have new sympathy for people who try to predict climate change—predicting something uncertain in the future with very certain costs in the now."




Buffett&#8217;s call

Buffett’s call


hi-res




Why is gold considered a hedge against fiat currency? If the monetary system collapsed &#8212; as in, the USD or the GBP or the JPY were no longer accepted in exchange for goods &#8212; are you absolutely sure people would accept Gold as a substitute?

This is not gold coins minted by a current government &#8212; it&#8217;s gold bars, gold bullion, or gold coins from some historical government (like, Spanish doubloons).

Gold, just exactly like fiat currency, is worth something just because other people think it will be worth something.
So if that&#8217;s the case &#8212; then why is gold considered a hedge against inflation?

Why is gold considered a hedge against fiat currency? If the monetary system collapsed — as in, the USD or the GBP or the JPY were no longer accepted in exchange for goods — are you absolutely sure people would accept Gold as a substitute?

image

This is not gold coins minted by a current government — it’s gold bars, gold bullion, or gold coins from some historical government (like, Spanish doubloons).

Photo detail

Gold, just exactly like fiat currency, is worth something just because other people think it will be worth something.

So if that’s the case — then why is gold considered a hedge against inflation?

image


hi-res




Follow-up: Herbalife $HLF hasn&#8217;t dropped yet. I wonder what the time frame for Bill Ackman&#8217;s shorts was?
(Did I mention I got google ads from Pershing arguing the short position?)

Follow-up: Herbalife $HLF hasn’t dropped yet. I wonder what the time frame for Bill Ackman’s shorts was?

(Did I mention I got google ads from Pershing arguing the short position?)


hi-res




I had a Managing Director tell me years ago … that the best strategy to succeed in investment banking was to keep your seat. Success would come, and success would go, but you could never enjoy the fruits of good luck or a heated market if you weren’t in a position where you could get paid. Young and naïve as I was, I remember finding this advice rather cynical and dispiriting. Surely you kept your seat and made lots of money for your firm because you were really good, because clients respected and trusted you, because you gave them great advice. Because you were better than anybody else. This was stupid on my part. He was right.

Nobody is indispensable in my industry. Nobody. Ever. For every hotshot trader or investment banker glorying in her run of luck and outsized compensation, there are twenty waiting in the wings who could do just as good a job. And a hundred who would be willing to work for half pay to prove they could do so too.

I’ve said it a billion times: in investment banking or sales and trading, you’re only as good as your last deal or your last trade. And your last deal or your last trade had much more to do with you being in the right place at the right time—being in the right seat—than with your charm, skill, or intelligence. And none of us know when the right deal is going to hit.

[T]here is nothing about your charm or intelligence that will distinguish you from the line of a hundred identical eager valedictorians waiting outside our hiring office. If anything, they’re probably hungrier and more naïve (hence more malleable) than you. Intelligence is table stakes.

The Epicurean Dealmaker (@EpicureanDeal)

 

Mega admire him for saying this.

(Source: epicureandealmaker.blogspot.com)




by @Macro_Tourist

Interest rates since 3000 B.C.

  • credit crisis of 33 A.D.
  • code of Justinian
  • Uruk, “city of sheepfolds”, had a writing system, counting system, and calendar system
  • 16% rates in Athens 600 B.C.
  • Solon’s reforms 594 B.C.
  • early interest rates just used 1 unit of money per unit of stuff per unit of time; no decimalised share prices in the Code of Hammurabi (1772 B.C.)
  • Temples as proto-banks

With regards to big data, just think how much work @Macro_Tourist (and Sidney Homer) had to do to put these graphs together versus recording some twitter history or server logs. Talk about wealth of information versus interesting information.

Closer zoom:

image

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Sidney Homer: “Each generation is inevitably surprised by interest rates”

(Source: twitter.com)










John Moody is credited with initiating agency bond ratings, in the United States in 1909. Exactly three centuries earlier, in 1609, the Dutch revolutionised domestic and international finance by inventing the common stock — that of the Dutch East India Company — and founding a proto-central bank, the Wisselbank or Bank of Amsterdam.

…the Dutch … had … stable money, … banking … securities markets…. the leading economy of the seventeenth century. In 1688, the English … invited … William of Orange, to be their king. William brought … Dutch financiers … and in short order England, too, had all the key components of a modern financial system—the Bank of England, for example, was founded in 1694.

A century later … Alexander Hamilton … put in place … a similarly modern financial system during … 1789-1795. By 1795, the US, essentially a bankrupt country before 1789, had strong public finances, a stable dollar based on specie, a banking system, a central bank, and bond and stock markets in several cities. And just as the English had succeeded the Dutch in economic and financial leadership, the Americans went on within a century to succeed the English as the world’s pre-eminent national economy.
Richard Sylla

(Source: www1.worldbank.org)




image

The entire history of the US Dollar. by @Macro_Tourist

How is the dollar index constructed nowadays? Roughly like this

50.14348112 * EURO^.576 * YEN^.136 * POUND STERLING^.119 * CANADIAN^.091 * SWEDISH KRONA^.042 * SWISS FRANC^.036

(Source: twitter.com)




I like this concept of “low volatility, interrupted by occasional periods of high volatility”. I think I will call it “volatility”.

Daniel Davies

via nonergodic

 

(PS: If you didn’t see it before: try plotting this in R:

vol.of.vol <- function(x) {
    dpois(x, lambda=dpois(x, 5)
    }

… and so on, to your heart’s content.

imageimage
image

Fun, right?)