Nassim Taleb’s Big Idea: Transforming Debt Into Equity
Guest Post by John Aziz of Azizonomics.
I have mentioned, in passing, the possibility of transforming debt into equity as a solution for many of the troubles in the global financial system.
I borrowed the idea from Nassim Taleb and Mark Spitznagel, who floated it in 2009. It is unfortunate that the idea has not yet been taken very seriously. There are probably two reasons for this: firstly Taleb and Spitznagel never fully fleshed it out, and secondly because the political and media punditry don’t really recognise the graveness of the present situation. Largely it is hoped that we can muddle through; radical solutions tend to get left on the shelf.
It is my view that it is much better to fix the system in a fundamental way, rather than clobber together solutions piecemeal. The latter approach has been the norm — from the bailouts of Greece and euro austerity, to the bailout of AIG and the wider financial system, to quantitative easing and LTRO, to Obama’s stimulus package — the focus has been on keeping a system that is falling apart at the seams from crumbling completely into dust.
So what is the problem that governments fear so hugely?
“Surprising” Risk Off
Einstein is proven right again. “There is only one thing larger than the universe, the stupidity of man kind”.
People have been brought to a state of “new normal”, where the markets keep churning higher on no volume, and declining volatility. If you still believe this is the way forward, something “disturb ing” is occuring as we speak. Fat fingers or flash crashes, it doesn’t matter, volatility is coming back, as the last momo has been back, loading up on everything, just because everybody else is doing the same thing. Charts below:
Long Term Dow Chart-time to sell?
Interesting chart and observation on the long term Dow chart. With the LTRO out, maybe it is finally time to sell the news….. Courtesy Jesse’s Café.
A failure in this broadening top could, if activated, take the DJIA down closer to the bottom of the long term logarithmic trading channel.
The Federal Reserve will do all it can in order to create liquidity to prevent this sort of major market crash.
I can also that resulting in a sideways market, within a fairly broad range of 7,000 to 15,000 on this log chart, until 2020, as we see happened in the 1970′s after the 1960′s stock bull market. That also fits well with the stagflation forecast.
As a reminder, when looking at a very long term chart like this it is important to remember that it is not adjusted for inflation.
However this all works out in nominal terms, the Dow/Gold ratio is likely to touch the 1.5 or lower level at some point in the next eight years. Charts below.
What is silver/gold ratio implying?
Silver has been the “performer” this year. The silver/gold ratio is hitting levels not seen since September 2011. The ratio is reaching some important levels,but are there implication for the risk on/off mood?
The GOLD-SILVER RATIO drops to its lowest level since September 2011 (48.50), testing the ratio’s 200DMA at 48.50 (and 400DMA which also intersects at this level). A falling ratio means more demand for Silver than Gold ($1800 : $37) To put this in perspective it is estimated that governments at present only hold at most 60 million ounces of silver, as compared with 1 billion ounces of gold.
HFT and fallacy of spreads
Gust post by Nanex.
Occasionally a new study comes out claiming HFT narrows spreads. There are a number of questions you need to ask about these claims, such as how recent is the data set analyzed, what is the resolution (1 second, minute or daily), how are spreads measured, and what subset of symbols were used in the study? For example, this article from The Economist uses the following graphic supplied by a pro-HFT camp which purports to show tighter bid/ask spreads. Never mind the obscure explanation (or lack of) for how this one line is calculated, you simply need to look at the dates to realize someone doesn’t know their history very well. HFT trading was born with Reg NMS in early 2007 (left circle), and shortly thereafter, spreads actually spike higher. Furthermore, spreads are right back to where they started (right circle), but we are stuck with all the negative HFT baggage. Remember, this image was supplied by the pro-HFT camp!
LTRO-All you can eat
LTRO explained in a few minutes, while we await the new “free” money shortly.
Video below.
News That Matters
“It takes a genius to whine appealingly.”
— F. Scott Fitzgerald
Ft.com
Mitt Romney has won the crucial Michigan primary, reports the FT, fending off a strong challenge from Rick Santorum after a bitter contest that has left Republicans anxious about damage to the party from the prolonged presidential nomination race. http://ftalphaville.ft.com/thecut/2012/02/29/902901/romney-wins-crucial-michigan-primary/
JPMorgan Chase executives have told investors the bank will prosper even after the implementation of new regulations as they maintained profit targets and dismissed talk of a historic threat to Wall Street’s business model, http://ftalphaville.ft.com/thecut/2012/02/29/902761/dimon-dismisses-regulatory-threat/
The US investigation into insider dealing on Wall Street has broadened to include trading of biotechnology and pharmaceutical stocks, says the FT, citing a person familiar with the matter. The FBI and the US attorney’s office in Manhattan are honing in on trades by hedge funds in biotech and pharmaceutical stocks around important drug approval announcements and corporate takeovers, http://ftalphaville.ft.com/thecut/2012/02/29/902721/insider-trading-probe-broadens-to-pharma-stocks/
Taxpayers will have to wait up to 15 years to recoup the money spent on rescuing Northern Rock, according to the first official analysis of potential returns from the bail-out. The FT says a report published on Tuesday by UK Financial Investments, http://ftalphaville.ft.com/thecut/2012/02/29/902681/taxpayers-face-15-year-northern-rock-wait/
MMT for ECB?
MMT (Modern Monetary Theory) pretty much says forget what you have learnt in school. From Michael Hudson on how MMT could “fix” Europe.
I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature.
Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its economic blog, New Economic Perspectives), criminologist and law professor Bill Black, investment banker Marshall Auerback and myself (along with a French economist, Alain Parquez) stepped into the basketball auditorium on Friday night. We walked down, and down, and further down the central aisle, past a packed audience reported as over 2,100. It was like entering the Oscars as People called out our first names. Some told us they had read all of our economics blogs. Stephanie joked that now she knew how The Beatles felt. There was prolonged applause – all for an intellectual rather than a physical sporting event. (Full article here).
Super Dalio
Dalio does it again by earning 13.8 Billion USD for his clients last year. Simply, the best.
Below is a list of how much money clients have made investing in top hedge funds since inception. The data are provided by LCH Investments NV.
Hedge Fund Net Gains Year Founded Bridgewater Pure Alpha $35.8 Billion 1975 Quantum Endowment Fund $31.2 Billion 1973 Paulson & Co. $22.6 Billion 1994 Baupost $16 Billion 1983 Brevan Howard $15.7 Billion 2003 Appaloosa $13.7 Billion 1993 Caxton Global $13.1 Billion 1983 Moore Capital $12.7 Billion 1990 Farallon $12.2 Billion 1987 SAC $12.2 Billion 1992
Full Bloomberg article here.
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