Thursday, May 13, 2010

Political Differences

Here is my contribution to the differences between Republicans and Democrats, a footnote to this article.

Republicans' number one goal is to do whatever it takes to get and keep power. Their ideological hero is not William F Buckley but John Wayne and Dirty Harry. They admire those who tame the untamed. They stir up conflict and create external threats to create unity and consolidate power. *

Because power is their sole aim, they are short on ideas once they get into power--the vision thing. Corporations have been synergistic by giving Republicans a job to do--help corporations--and more power in the form of money. This relationship did not begin in the 20th century. It goes back to the rise of corporations after the Civil War, not long after the Republican party was born, but it has clearly been reinvigorated more recently.

In contrast, Democrats still lead with ideology. Their heroes use words to defeat bullies--Clarence Darrow, most Jimmy Stewart movies. They value debate as a means to improve their ideology even if it splinters the party.

Their weakness is the opposite of the Republicans: plenty of vision but less emphasis on the will to execute it. In the worst cases, Democrats have been maneuvered to take a position against the exercise of power, crippling themselves.

--Republicans are tamers, living in the bottom layer of Maslow's hierarchy. Democrats are developers, living at a higher level. There might have been natural synergy and balance here, but the parties have not evolved that way.

--Democrats triumphantly point out the hypocrisies, inconsistencies, and intellectual poverty in Republican arguments. Republicans...don't care. None of these things is important to Republicans unless they interfere with power. Democrats are preaching to the choir, their own base. Nothing wrong with that, but it won't make any bipartisan inroads.

--Democrats believe they won 2008 because:
America was fed up with 8 years of Bush
Backlash from banking crash/crisis
Obama outclassed and out-debated McCain

Republicans believe they lost 2008 because:
Obama raised more money

There is truth in both views, but there are also colossal blind spots.

Democrats watch the right for signs of coalescing ideology because ideology is important to Democrats, but it's just not that important to Republicans. Democrats that are watching Karl Rove, shadow organizations of all kinds, and behind-the-scenes power grabs are on the right track. I'd even go so far as to expect Republicans to break laws because it's consistent with their values.

Republicans did not take Democrats seriously even after Obama and a majority got elected in 2008. Republicans did not take Democrats seriously until they proved they could actually wield power and get legislation passed.

There is a lesson here for Democrats. Republicans don't care who is right. They care who is stronger. Democrats won't earn the respect and cooperation of Republicans with mercy or letting Republicans save face. They will only earn it by winning fights against Republicans.

*Former Conservative idealists--those small-government, free market people, are relegated to the fringes and often labeled libertarians. There is an interesting split forming because the Ron Paul idologues are daring to take on the Mitch McConnell/Karl Rove corporatists and break up Republican unity.

Sunday, May 9, 2010

Us vs Them part 2

I'm happy to see more people writing about the conflicting agendas of long-term capital investors and short-term speculators. This is a excerpt from an article by Dallas Mavericks owner Mark Cuban.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

Friday, May 7, 2010

Flash Crash Cash

The spin has already started on the flash crash that sent yesterday's market down 1000 points (largest one-day drop ever) and most of the way back up in the space of less than half an hour. After a lot of speculation, the trigger now stands identified as NYSE's brief (under two minutes) mechanical pause in trading for five stocks whose buyers and sellers had drifted too far apart. (I suspect there is more we don't know yet).

How did such a small action cause such fallout? The answer comes from computerized trading where algorithms tell computers when and how to execute trades. There are so many of these that we saw extreme results: some stocks trading at zero (which is a computer finding no buy orders and therefore bidding a penny) and a stock that started and ended the day around $34 a share but in between hit $100,000 a share (Sotheby's).

What was it about the NYSE pause that set this in motion? The answer is liquidity, much like the credit crunch that hit a few years ago. When the NYSE used to control most of the stock of the companies on its exchange, it could pause trading without incident. Today, the NYSE controls only about 25% of the stock of the companies on its exchange. The rest is controlled by private, mostly computerized companies like Tradebot (yes, that is its real name).

When the NYSE shut off its trading momentarily, other traders registered the event as a sudden loss of liquidity--as if trading volume had suddenly left the market. This triggered a computerized panic followed by a human panic long after the triggering event was over. And even more reassuring, nobody's quite sure why the market rebounded so fast; it's suspicious. (How computerized trading is rigged.)

Among many automatic actions that were triggered, firms like Tradebot suspended trading at -500 points. At first glance, this sounds like a bad thing. Dick Rosenblatt, chief executive of Rosenblatt Securities (whose site features a Dark Pool Liquidity Tracker right on the home page), was quoted in The Wall Street Journal saying that the triggers were bad because by halting trading, the tradebots of the market withdrew more liquidity and thus accelerated the fall. He said,

"How have we incented algorithmic traders and high-frequency traders to enter our markets in times of stress? We really haven't."

In other words, he suggests that there are traders out there who would enter the market in times of stress to add liquidity if only there were financial incentives for doing so. We could avoid future flash crashes by rewarding these white knights who add liquidity to the market.

How would they add liquidity to the market? By buying up falling stocks at below-market prices. And....they need extra incentive for this?

Yes. As it turns out, exchanges like NASDAQ are backing out the most extreme of the transactions that occurred during the flash crash, 2/3 of which involved ETFs. Only transactions that were within a certain percentage of the pre-trigger price were allowed to stand--and that could hang speculators--excuse me, white knights adding liquidity to the market--out to dry.

For example, suppose a stock began the day at $60. A trader bought the stock at $10 then sold on the rebound at $50. The buy is wiped out because the price is too extreme. But the sale is within acceptable price range and would stay. Thus, the trader is left holding the shares short at $50. His previous profit is wiped out. To make a profit now, he must buy again at a price far enough below $50 to cover trading costs—and this on a stock that started the day at $60.

I want to point out here that the esteemed Wall Street Journal only interviewed HFT (High Frequency Trading, aka speculating, day trading, and churning) insiders for its article. The other quoted source was from a company that creates computerized trading programs. What were they going to say, that algorithms are a mixed blessing, allowing greater efficiency in trading and portfolio design while also creating potential market energy that can be manipulated by speculators?

Not hardly.

Did the esteemed Wall Street Journal talk to anyone not profiting from HFT? Public official? Long-term investor? Investment science academic?

Not hardly.

So what we have here is a WSJ article whose only quoted sources represent the speculators that are still, even now, siphoning short-term profits out of the economy. The article presents only the idea that speculators, who are quite able to CAUSE crashes, should be let loose to fully profit from crashes.

Fortune starts off with good skepticism, zeroing in on the trigger as the key question, but then says,

What, if anything perpetuated the selloff? And did so in seconds? There's a lot of speculation about high-frequency traders vanishing from the marketplace. The consensus is that high-frequency guys didn't provide the liquidity and that's what allowed for prices like one penny on Accenture.

In point of fact, this is accurate: HFTs withdrew liquidity. But the implication here is that HFTs should have provided liquidity--should have bought in at below-market prices to save the market.

Why in the world settle on HFT? Why not government? Why not shut the whole market down if things go nuts?

I don't favor a particular solution to this problem, but I do have a problem when only one solution is considered and that "solution" perpetuates bad financial management.

On the other hand, I do own a soapbox called "putting limits on speculation as a percentage of total market volume to prevent bubbles and steer more money toward true economic growth." Congress and economists have not embraced this idea the way I'd like, but I still hope that regulating derivatives is a first step toward limiting gambling and HFT.

Toward that end, I can just picture future Congressional testimony that we can't possibly limit HFT because we need their liquidity to stabilize the market in the event of a crash.

We must always remember this is us vs. them. Speculators profit from market volatility--and know how to cause it. Long-term investors and our national economy prosper from stable market growth.

Now the speculators say that only they can save us from market instability, but we both know what they are asking for is protection money--and the financial press is willing to be their mouthpiece.

Tuesday, May 4, 2010

We Need Norman Lear

Norman Lear had a way of exposing the hollow center of people who were afraid of social upheaval and blamed anyone different from them for anything they didn't like. His archetypal creation was Archie Bunker, a middle aged white guy meeting 1970 with the social awareness of 1950. His every gaffe, malapropism, and outright expression of bigotry was an opportunity for us to laugh and for his educated son-in-law to explain--to Archie and the nation--why Archie's way of thinking was outdated or just plain wrong. And the nation listened. All in the Family took on the most sensitive topics of the day, and it was the number one show for years.

Who is the next Norman Lear out there, ready to present a smart political sitcom that exposes the inconsistencies, switchbacks, and muddleheaded thinking of the Tea Party to the regular laughter of today? We need you.

Here is some of Archie Bunker's classic humor from the early 1970s. Any parallel to the present is purely intentional.

Archie: ....Petey, the white-nosed Commie.
Larry: Petey? A Commie?
Archie: That's right. Remember that night we was all talkin' about Spiro Agnew--and what did Petey say?
Larry: He didn't say nothin'.
Archie: On orders from you-know-who. That's how them Commies work. And you're his friend.

You think William Buckley's gonna give blood to some Commie punk what's just blowin' up a building?

"And the rib which Lord God had taken from man made He a woman and brought her unto the man. And Adam said this is now a bone of my bones and flesh of my flesh and shall be called woman because she was taken out of man." There it is in black and white! So we didn't crawl out from under the rocks and we didn't have tails and we wasn't a bunch of monkeys neither, you atheistic pinko meathead, you!

Archie: Listen, you and me had this argument before over Jesus and I ain't going over old ground again. Jesus was white and so was Santa Claus.
George (who is black): Listen Bunker--when I was a kid, the guy who filled my stocking on Christmas Eve was black.

Your colored run faster. They jump higher. They don't bruise as easy. And because of their what you call it, jungle heritage, they see a lot better, good for night games. All I'm sayin' is it was unfair to the white ball players...who weren't exactly fortunate enough to be born with the same natural endorsements.

Sunday, May 2, 2010

Fun at LATFOB!

Last weekend was the Los Angeles Times Festival of Books, and some of us book tweeps got together for drinks and Indian food in the Westwood area:

@booksquare (Kassia)

not pic: gamesafoot

My camera shutter did a strange thing for some of the pictures. I could say I did this cool artistic effect on purpose, but I'd be lying.