Thought Bubbles from the Deep

[DeepState]

Have a look at the US based futures Brokers. They have protections that you will never get in Oz.

http://www.sipc.org/

Thanks. That's a nice safety net and would offer protection against fraud in cases like BBY and MF Global.

 

[Trembling Hand]

Thanks. That's a nice safety net and would offer protection against fraud in cases like BBY and MF Global.

Yeah ask anyone that had an account with Aus MF Global compared to US MF Global. Think US got their funds back in a few days. Aus customers got screwed around big time and lucky to get what they did in the end.

 

[DeepState]

This issue with pooled client funds... doesn't it applies only when the whole of Macquarie is in trouble? It'd be quite rare for MQG to ask other clients to take a haircut because some of them couldn't pay up. Chances are the bank itself will incur bad debt but clients would be made whole by funds from other parts of the institution.

Obviously MQG being a large listed entity should at least allow you to monitor the situation

Thanks. It is quite possible for MQG to remain standing but for some hedge fund client to take on more losses than they have assets in total. If the liquidation value of the hedge fund is insufficient to make up for the losses incurred beyond the deposits, the other assets in the trust accounts (ie. my money) is available for use to settle vs the clearing house. If I was the other side of their trade and made a fortune, those mark to market gains can be held by the clearing house to offset obligations from Macquarie to settle the other side....

This is the most common arrangement amongst futures brokers. I can't believe it when I read it. This industry remains one of dictum meum pactum ("My word is my bond." which is a saying I really like, unless your bond is a CDO-squared piece of dig shot)

One way would be to hold enough capital in the CFD account to avoid margin calls in all possible conditions, even when the market is "withdrawn" by the CFD provide. To manage your risk, you will need a second account where you can have your stop order. If the stop is executed, you can then square up the 2 accounts when markets return to more normal conditions. Obviously this negates the benefits of leverage and exposes yourself to increased counterparty risks.

Turns out IG has fixed maximum spreads on almost all of their index products. I didn't know that. That's a solid innovation that actually helps contain execution risk and allays concern for the things I was worried about. I am not sure if this kind of innovation is a feature of other CFD platforms.

[I am not an employee etc. of IG]

 

[DeepState]

USD: Post #Trump, all news was good news - except for #fakenews that a weak dollar policy might have been in store to counter the other master manipulators.

More recently, any news is bad news for the USD.

ECB conference call had basically nothing in it except for a reporter's question which led to a statement that the issue of TLTROs (special lending facilities) weren't discussed by the Members. So, the lack of discussing something was seen to be a reason for the Euro to rally around 1% vs USD.

NFP last week was a strong beat. Sell the USD.

FOMC raises rates and confirms the outlook, making it clear that the 2% inflation target is there. Dots move up. Sell USD.

 

[Trembling Hand]

Here is an interesting one.


Workers in the US so confidant they are walking away from jobs like its 2001....

wait how'd that work out?

 

[skc]

Here is an interesting one.

Workers in the US so confidant they are walking away from jobs like its 2001....

wait how'd that work out?

Where are they going? Start up's? Trading bitcoin?

 

[Trembling Hand]

Where are they going?

I guess the main thing is that I think this is raw data so more people in employment the higher the number who at any time are quitting?? So unless its shown against the amount in work it is really just tracking employment . But,

Start up's? Trading bitcoin?

Most def they are trading bitcoins. Easiest way to riches and if ya not onto it you'll be going the way of a production line worker, blacksmith, print jurno and non-AI Trader.

 

[McLovin]

Here is an interesting one.
View attachment 70371

Workers in the US so confidant they are walking away from jobs like its 2001....

wait how'd that work out?

Baby boomers retiring?

 

[skc]

I guess the main thing is that I think this is raw data so more people in employment the higher the number who at any time are quitting?? So unless its shown against the amount in work it is really just tracking employment .

It looks like the number of confident quitters doubled from ~2010. You wouldn't think the number of people employed has doubled since that time as well.

So as a percentage of the employed it would still have gone up a fair bit.

Most def they are trading bitcoins. Easiest way to riches and if ya not onto it you'll be going the way of a production line worker, blacksmith, print jurno and non-AI Trader.

I am pretty sure they've proved that bitcoin itself was created by an AI with the sole purpose of keeping those in the matrix feeling rich.

Baby boomers retiring?

No idea how these stats are compiled, but you'd hope quitting and retiring are recorded differently.

 

[McLovin]

No idea how these stats are compiled, but you'd hope quitting and retiring are recorded differently.

Yes, you are right

Separations. The separations level is the total number of employment
terminations occurring at any time during the reference month, and is
reported by type of separation—quits, layoffs and discharges, and
other separations. (Some respondents are only able to report total
separations.) The quits count includes voluntary separations by
employees (except for retirements, which are reported as other
separations).

https://www.bls.gov/news.release/jolts.tn.htm

 

[DeepState]

The above are the JOLTS Quit rates for large (sub) industry classifications which tend to have higher turnover. My analysis of the underlying suggests that they really aren't moving elsewhere. These industries are actually increasing employment. In other words, it looks as if people are chucking in their jobs at one place to work at a higher paying (or otherwise better) alternative within the same industry as more opportunities present themselves and greater choice is available.

The relationship between the Quits peak of 2001 and the subsequent economic outcome was probably affected by a couple of planes flying into buildings although JOLTS Quits is definitely a stat you would consider when looking for signs of overconfidence. Yellen is looking to the JOLTS Quits to help gauge the degree of tension in the labour market, for example.

In order to make sense of the current observed levels it is helpful to consider that there would be a heap of people who have been stuck in jobs they have hated for years and are now moving on. In my view, a reading of 2.2 now is less a sign of overconfidence than a reading of 2.2 back in the early 2000s because of the backdrop leading in to those figures.

 

[DeepState]

Does anyone have a good source of 'Event' information like "OPEC Meeting" or "French Presidential Election" in the kind of format you'd easily find for economic calendars? Citigroup produces something, but it's a bit messy.

 

[skc]

Does anyone have a good source of 'Event' information like "OPEC Meeting" or "French Presidential Election" in the kind of format you'd easily find for economic calendars? Citigroup produces something, but it's a bit messy.

This one from bloomberg has most of the bigger things, which is sourced from the second link. I don't know if it has political events however.
https://www.bloomberg.com/markets/economic-calendar
http://www.econoday.com/

 

[DeepState]

There’s probably two main issues here that I’d like to bring up. (As an aside, it probably goes without saying that this applies to any industry, it just happens that the finance industry is extremely topical and arguably very dominant in the world today).

The first, as we’ve both touched on, is to what extent and scope the finance industry should be allowed to operate.

What is its function to be: is it there to support other industries, that is, to help facilitate the transactions between corporations or individuals, and to assist in storing their wealth? Obviously, this function should entitle it to some profit on the capital or labour it has invested if we are indeed within a system of capitalism.

However, one must ask, as you also have, how far should this be allowed to go?

Should it also be permitted to go further than this and have an entirely new role in its own right with the sole objective of creating more value (wealth/money) for itself?

Secondly how profitable should the finance industry be (both in terms of return on capital and also in magnitude in comparison to the economy as a whole).

For both of these questions a good example is participation in financial markets by big players in the finance industry. I do accept that this is a grey area, because as you said, some of this participation is assist with managing risk, storing wealth or transactional purposes. However, in other cases, the sole purpose is to create profit, and in turn these actions create new risk (for instance by use of massive leverage), and because of the massive size of the finance industry as a whole, this risk has consequences that go well beyond the industry itself.

It's hard to make a decent argument as to why this should be allowed to occur, given the inherent systematic risks (as you said, the GFC was close to causing the ‘Great Depression’ all over again).

Obviously the cost to society is massive. It’s hard to find risks created by other industries that are anywhere near the same magnitude.

If I was an alien looking down on earth, this would be a strange concept to witness, men creating money out of nothing but more money! And for what end? It’s really hard for me, as an outsider to the finance industry, to see what benefit this has to the rest of society. As you eloquently say below they don’t produce a single widget. Nothing but numbers on a screen, formerly figures on pieces of paper.

By default a lot of the discussion around this, but not limited to just this facet, has to do with how much ‘surplus value’ is created and how this is distributed in society (whether it’s to the capital owners, paid in government as taxes for re-distribution, to stakeholders such as employers etc.).

There obviously needs to be a trade-off between the risks created (to society at large) and the benefits shared. But how can these be measured? Certainly not objectively! How do you make someone accept something when they will just argue it’s not objective?

A lot of people are upset because they, whether rightly or wrongly, although they can see a large quantum of profits created by risk taking activities in the finance industry, there is a perceived lack of consequences to the individuals involved when it all goes wrong and these risks become reality.

We don’t tax corporations (of any kind) or individuals on the basis of the risks that they create for society at large, but only on the basis of profit. This is a pretty hard discussion, and it’s really hard to have, because everything in capitalism is predominately measured on a monetary basis. So it’s hard to quantify said risks because a) probability isn’t objective, b) you don’t know the costs of actions until risks become actual outcomes and c) even then there are unidentifiable costs, including those that are non-monetary (emotional, psychological). God help us with this discussion, the carbon tax / climate change debate is a really good example of how this works in practice.

As for society as a whole you make some prescient points, especially on the culture of greed, and the fact that this creates a society that can be separated into winners and losers.

(As an aside I actually like the word ‘desire’ better than ‘greed.’ But beware that itself opens a can of worms: what is desire? What causes it? The individual or an ‘Other’ amongst other deeply philosophic concerns)

Therefore I agree, the finance industry is a microcosm of society as a whole and alone it isn’t the only issue and maybe not the biggest, but the problem is as I think we’ve both kind of said, it’s magnitude is way out of whack, so it’s a pretty obvious one for which to take aim towards.

We could have a massive discussion around this. There is no end to where it could go.

Certain monopolies are regulated. Their profitability is set with reference to things like CAPM. They provide a vital service to the community and the government is concerned that private wealth does not extract an excessive rent from doing so.

Should finance be such an industry? In some ways the banks are subject to this. By increasing the capital requirements and setting capital adequacy factors to different kinds of loans and assets, their profitability and riskiness is contained. In the pre-GFC period, the degree of leverage permitted was clearly too much. Today, that figure is vastly lower. However, that is only one kind of leverage and many more types can be created which circumvent this.

One way to do so is via derivatives whose treatment is varied. The GFC was made much more complex due to the way that the entities were related...via a web of synthetic CDS and other things. One way to protect against that is to treat OTC derivatives in a similar way to ET derivatives...keep collateral and have central clearing house. And there are moves in that direction.

If something becomes too big to fail, all sorts of weird incentives take place which puts everyone at greater risk but makes the people doing it very rich. The antidote is... to shrink things so that nothing is to big to fail. There is still much work to be done here. The implicit cost to society for bearing this risk has been estimated and the idea is to either pass it back to the bank or shrink the bank such that the wider society is not bearing the cost for keeping the thing running.

There's heaps more stuff, but hopefully you see that there have been significant steps towards addressing the matters you have raised but keeping the industry very much a capitalist driven one albeit with more safety rails now than before.

I think one matter which has not been raised is that of regulatory arbitrage. Bottom line, finance pays very well and it attracts very clever people who have strong incentives to make money. They outgun the regulators every day of the week. It's almost like trying to regulate the internet or tech companies. Good luck.

We do need much stronger governance at banks. We do need excessive compensation to be reigned in. We need fund managers to hold management heavily accountable rather than just sell the stock. We need the fund manager clients to actually invest in a way which rewards this. There is a whole chain and society gets what it gives.

Are the profits to finance out of step with the actual production? I would argue that farmers play a very important role. Without food, we die. Yet they mostly get paid poorly. Engineers build bridges and no movement of goods could occur without transport....paid like crap. Financiers create loans and securities, and trade them...some get paid boatloads. Fair?

Doesn't seem like it on face value until you ask yourself whether this is some closed shop union. Absolutely not. Entry into very high paying jobs in finance, management consulting etc. is heavily democratised. No one cares if you are half Russian/Chinese (it's actually a positive in quant) with green eyes, etc, and 4'8" with parents from Tejekastan. If you are smart, work your arse off, can find a way to get stuff done in chaos...you will be hired and your will be promoted rapidly if you can make the firm a boat load of money....or set up your own firm. Period. The old school tie is long gone. You'd think that this would eventually equilibrate the value chain to what it should be.

To set up a fund manager takes virtually no capital. I can build one in a week. So can heaps of others. Yet the fees remain high because people are prepared to pay it. No one forces them to. Why do investment bankers get paid tens of millions for advisory fees in M&A, most of which actually destroy value?

The capitalist system is supposed to figure out who gets what on the basis of who has the best bargaining power. So, if you think that the spoils to finance are out of step, we should ask why people pay for the service at that level, because it most definitely is not some form of unregulated monopoly.

 

[Ves]

Thanks heaps for your insights into the regulatory changes, DS.

Your comments about the 'regulatory arbitrage' seem pretty important to me. It's a bit of an arms race in that respect. It really highlights that no matter what regulations or laws are introduced there will always be someone who is clever enough to find a loop-hole. The regulators are like a dog chasing its tail in that respect. When a problem/issue is a cultural thing it's very hard to introduce laws to stop it.

I tried to have a think of how you could make the finance industry (banks in particular) subsidise the (or maybe a better term is self-insure) the systematic risks that they create on a society wide level. There's ideas like 'bail-out funds.' But the costs of catastrophic failure are probably so large globally that any tax or levy on the banks profits would not come any where near covering this amount any time soon. It also punishes those banks who take less risks and unless you can come up with a reliable way of measuring the cost of said risk (good luck) then it's obviously not going to be implemented.

Whlist there is collaboration on a Global level between governments, I assume that certain regions/jurisdictions also don't agree on all of the finer details.

Another hurdle seems to be that there the fate of Governments (ie. rightly or wrongly, they get measured by how the economy performs) is entwined with the performance of the finance industry because of its large size. Whilst I can see that governments around the world are actively trying to reduce systematic risk, it would appear (not sure if I'm correct here) that they can only pull so many strings before the economy is materially impacted. Obviously at the moment we are already in a 'low growth' environment which makes it harder still. I assume that the finance industry also has a lot of lobbying power and the power to make large political donations as well. I imagine things like these make it much harder to fix the problems in the finance industry in the most efficient and quickest manner.

 

[DeepState]

What should we do in portfolios to make allowance for an increasing risk of conflict with North Korea and disputes in the South China Sea?

US vs China hot war still seems far away (China force projection probably isn't sufficient to support naval warfare too far away from its shores against a strong foe).

The North Korea situation requires intervention. Trump, like Bush, will want to show strength and leave a legacy. I think the risk of conflict is >30% within his first term, at a guess.

 

[qldfrog]

What should we do in portfolios to make allowance for an increasing risk of conflict with North Korea and disputes in the South China Sea?

US vs China hot war still seems far away (China force projection probably isn't sufficient to support naval warfare too far away from its shores against a strong foe).

The North Korea situation requires intervention. Trump, like Bush, will want to show strength and leave a legacy. I think the risk of conflict is >30% within his first term, at a guess.

30% for one of the above, that is pretty high!! And I thought I was pessimistic, at least, with Trump and not Clinton in power, we should avoid a US vs Russia conflict that the lady was so keen to trigger

 

[DeepState]

There is a fair chunk of voodoo amongst the trading community in relation to finding supposedly amazing relationships that can be exploited for profits. One such statement was made by a prominent coach who charges money and has a large international following (paraphrasing):

"The probability of the Open of the EURUSD at the start of the week being covered in the trading period Tues - Fri is 78% over the last two years. Imagine if you knew that probability when you open your trade and ask yourself what that might mean for your profits."

The implication was that this was an amazing relationship. That a 78% hit rate is a sure way to profits and there is a seasonal element to it (start of the week creates gaps that get filled).

Sound familiar?

---

So I looked at the results over a five year period, because that adds more statistical significance. I did not try any other time period. Here are the results:



Monday does show higher likelihood of crossing the open again in the next four days. 76.2% in this sample and close to the figure claimed by the trainer. Interestingly, the other days all show 70%+ likelihood of crossing the open as well in the subsequent four days.

There is nothing special about 70%+ likelihoods. This is a skewed strategy, limited profits, pretty massive drawdowns if not crossed by end of the 'reversion' period. Hit rate is given primacy over expectancy.

Also, whilst Monday does show a higher rate of reversion to the rest of the week and gives rise to the Monday effect, the extent of this is well within statistical bounds on large data sets. It's just the type of thing that a trader who can operate Excel will mine the crap out of OHLC price data and find....and then trumpet with emphasis.

Worse still, the gap size being filled for Mondays is narrower than for the rest of the week, making the claims even more dubious.

---

There is much that is said by well followed people which is simply factually incorrect even if they actually believe it. I can understand that many aspiring traders have virtually no hope of distinguishing between utter crap, crap which was thought to be truth and the stuff which actually makes money. These statements, which make easy money seem so accessible under a veneer of solid analysis given by a guy who worked in some hedge fund or on some desk in London, creates false hopes and real losses. But the hope generates revenue.

 

[Trembling Hand]

There is a fair chunk of voodoo amongst the trading community in relation to finding supposedly amazing relationships that can be exploited for profits.

DS I don't know what context the above stat was stated but you may have taken the purpose incorrectly.

I use stats from daily/hourly/whatever data as a way of framing my understanding of likely range. It's not to find a direct edge rather to temper expectations and sometimes restrict trades or strangely expand the balls deep trade.

When I look at other people's posting of T/A based trades if they have targets and stops I rarely look at the "T/A pattern" I look at the likelihood of what type of event are they going to need just to get that type of range in their stated timeframe. A surprising amount of the time it doesn't pass the positive possibility filter. If you are trading short term the biggest bitch is regime shift on an intraday level. You are pretty much trading different markets from hour to hour.

As an example, Monday morning markets open down with something of a surprising gap down and in the first hour keep on pushing down on larger that normal first hour of week volume (I know that because I've checked what is avg is in excel ) But the question is what next? Do I go balls deep on a short as it retests the days low? Do I look for a short on the next lower high? After all the old the trend is ya friend - trade with the higher timeframe trend- insert whatever BS trading truisms ya want. Or do I have in the back of my head stats on Monday gaps that state we are likely to cross back over the gap sometime this week? With that stat I'm likely to start to think..... Ok we are bearish but that's probably it as far as range extension unless this regime is going to accelerate, and if so what is that actually going to look like, where are the stops, is the volume going to increase, are the locals getting swamped by the macro crowd turning up, blah blah. I start to look forward rather than expect the last hour will carry on to infinity(or zero).

There is rarely a go long/short here and close at here because these are the stats. It's about framing my bias.

 

[DeepState]

DS I don't know what context the above stat was stated but you may have taken the purpose incorrectly.

Hi T/H

The context was as follows:

A chart showing daily candles for EURUSD was shown:

The Mondays are marked with 'x'.

He comments on how unlikely it seems for Monday gaps to be filled on some occasions.

He says, directly quoting this time:

"...79% of the time, taking data over two years, or 105 occurrences, the market will revisit the Monday Open price at some point later that week after the Monday candle has finished forming."

He goes on to examine the likelihood of gap fills on each of the following week days. He asks his subscribers to consider "marking the Close level on Monday and considering it in light of the knowledge of the odds that this level will be hit during the rest of the week." Importantly, there is no discussion about the asymmetry of outcomes for pursuing this kind of idea.

"I've already found something very interesting in my own trading."

"Start thinking about that when you are in a position, or about to take one, and see if it improves your bottom line."

To me, he is highlighting probability of gap fill and implying, pretty clearly, positioning on that basis is supposed to do good things for you.

My contention is that the seemingly high rate of gap closure is the result of noise and that there is no big deal about Monday gap closure vs rest of week. The statements are technically correct, offered in a way which is supposed to be a meaningful input to improve trading outcomes, yet not actually value additive when examined further.

This is a consistent set of behaviours in trader talk: find an interesting relationship, highlight money making examples which seem plausible and meaningful to an untrained eye....no edge under further examination. Offer courses, collect fees.