Friday, August 23, 2013

Out of control

Yesterday, there was a three-hour period in which one of the markets couldn't process. Of course, people had to twiddle their thumbs during that period. Some say that it gave them a chance for a break.

One could ask: what finagling was going on in the background while traders were locked out?


In the context of discussing investors, there has been some notion that we need to look at the "oops" potential for the market. In fact, that things are out of control has been obvious for awhile (look from three years ago). Let's use this as an opportunity to look at the situation.


A New York Times article remarked about the "ghosts" that seem to be prevalent: In Markets' Tuned-Up Machinery, Stubborn Ghosts Remain. Jon Najarian, the options guy, points the finger at high-frequency trading; I agree, as their activity is of concern.


CDO in the mortgage context
This image comes from a Wikipedia article dealing with CDOs. They are a type of structured financial instrument that one can put into the derivative class. You see, you're building pie in the sky, essentially. Another way to look at it is perpetual motion (post from 2009). People, perennially, try to obtain such.

In finance, there seems to be no grounding in reality. In fact, even accounting fiddles with its rules. Right now, the CDO is only put here as one example of the idiocy. There are many, many more that we'll be looking at.

Aside: the logic of business is far removed from anything natural or mathematical (though, that is not the total answer,either) many times -- actually, thank God for engineering's necessity.

The CDO is a good example and metaphor. Warren Buffet characterized derivatives, once, as WMDs (look back at Bush's use). Yet, he's silent now. Why? Well, for one, his insurance partners make use of these techniques all the time. Did they shush him?

Look, Warren, the stuff still stinks. ... You know, just like pushing the dump out of town, business people can live in their gilded environments without much thought to the reality of the human resources that they exploit. Derivatives are without any reasonable support for the most part (of course, we can talk some uses, such as proper hedging -- ah, moving things around different warehouses in order to fool regulators is real mature (golden sacks) -- and other look-ahead strategies).


Now, mentioning Warren further, he touts stocks (equity) as important. At the same time, he knows that people lose their shirt all the time. In fact, look at the comments in that NYT article. One mentions that the costs of having markets with integrity would be prohibitive. Warren knows that he gets his pockets picked.

But, then, wait! Perhaps, the rich have a way around the money suckers and their games.

Aside: There are all of these studies that show equities gaining for the investor over time. Yes, some benefit. If we went back and did the proper analysis (costly, but, look, you have to pay to get the right type of market for the future -- and, software needs to be scrutinized in many ways, and at run time -- yes, it's not like simple error correction is sufficient, okay?), we would see that the gaming in the markets has caused a lot more loss than is warranted. So, people doing studies, please consider near-zero and the absent costs. In fact, doing the proper accounting would be a good, early step.


What has happened is that the advent of computing brought on an entirely different situation. Ben did not see this when he let his doves tell him to take the route of largess. Their sacking the savers (FED, thank you for slapping us silly for all of these years) pushed people after risky moves. Of course, the rest of us are pulled along by the idiots even when we try to protect ourselves (sandbox, people).

Idiots? Yes, the size of the pocket is not the measurement. Those with big pockets have such from ill-begotten gains (post from 2010). This is fairly easy to show with the proper perspective. The trouble with such a demonstration? How do you show something to those who can (will) not see?

We have to, at some point, think of sustainability (as in the future of our progeny) and establish ethical (beyond integrity) markets. That is, if we believe the "capital" hype, then we have to tell those people that a ca-pital-sino is not the healthy approach.


Jon (see above) bemoans the fact of the US losing its prime position in the markets. Well, if the markets are crooked, what glory is there? Too, Jon, what country can you point to that is ethical in its business dealings?

I say, Harvard types (egg-heads and beanie wearers of any institutional bias) ought to lead. Oh, I know, they (again, Harvard as archetype) went secular about 150 years ago. Let's go back further and pick up the heritage that was dropped.


You see, people, these jerks are pushing out software systems that implement bastardized mathematics under the guise that their stuff is great. Ah, yes, it's great for sucking money (post from 2009) from the hapless. In fact, there are costs that need to accrue that are being pushed out (Ben, come talk to me, and I'll explain -- no chance of that as Ben will run after the money, no doubt) to those without power. It's obvious all around.

In the past downturn, we lost our chance to make a real impact. You see, Ben's loose methods set in motion this current aeration. Even if it comes out of the taper without sinking the whole ship, the economy still faces potential harm from the growing use of computers.


The NYT says ghosts. I say stupidity. For one, the models are incomplete. Then, they're not thinking of side-effects that come from the inherent problem of the singularities that lurk (like ghosts, thanks NYT). Just what does that mean? We can say, as needed.

In the meantime, consider that a failure (of a systemic nature) is always around the corner. When this happens, things will hit the fan as who will understand the issue? You CANNOT build crap upon crap and expect to have a sustainable system (ah, the world-wide, wild web as a perfect example?).


How do we got back to a more stable basis? Ah, for one, get the junkies out of the room. That is, we need a sandbox for this type to crap in. Then, they get to clean up, to boot. Can Warren participate? Well, it'll be harder for him than his giving away his money (by the way, if money is ill-begotten - by definition, since the underlying market is a trash pit --- does giving it away wipe clean the whole slate?) to the poor.

Sheesh, how many impoverished are helped with hand outs when they were put into that position by greedy maneuvers? It's like this, Warren. Ever think about how easy it is to tear down versus build up. Of course, you do. Now, consider the wear that business as it is being done now does to the fabric of our being in toto. Even with the burden (say, trying to raise a family on the minimum wage), people still get the energy to work (multiple jobs at little pay), the human motivation comes through. That work (that causes the body to disintegrate -- erode - become maimed -- oh yes, IPhone by slave labor), too, big business people, is harder than any done by the egoistic CEO (gosh that grates when I hear those jerks talk -- I've did hard physical labor as a younger man - some CEOs did, as well, however it's worse now -- being driven as if one were a machine by stupid people with computers ... so much to discuss there).  


07/22/2015 -- Some of these are, now, poster boys.

12/16/2013 -- HFT's contributions to the turmoil'd (froth'd) markets.

11/24/2013 -- The ACM has a review article on algorithmic trading that everyone ought to read. Essentially, if we use a plane as an example (consider what Boeing has had to do to get the 787 out and about), we would say that the financial folks are putting passengers on experimental aircraft with little regard to their safety and comfort. The whole notion is atrocious. How does it happen? They've coached things in mathematics and computerese, plus they've bastardized Adam Smith's ideas. Where is our sandbox, and where is the stable economic system that we can build?

09/18/2013 --  Pop, fizz, ... Ben had to show largess because of idiots who ran the economy to the ground (rogues all around). Ben is going. What do we have to look forward to? Businessweek has a review issue (of the past five years). Several articles are especially interesting. Too, phrasing shines: spin dross into gold (in relation to mortgage bonds). Perhaps, we'll get back to some of the more pertinent ones, at some point. If we do, it would be to bring forward what has been said here, from the beginning. To wit? Tranche and trash (WSJ has a good take on that). Securitization? This article brings on weeping (one example of the misuse of mathematics and computing that has been harped about).

08/24/2013 -- Why do I think of golden sacks? Well, they represent the worse of the rogues, though I know that there are some good people working there who are doing the right thing. However, I have personal knowledge of two deals in which they were prime players in the role of experts in the matter. In both cases, workers lost their economic lives, some lost their pensions, both firms struggled. One actually went bankrupt due to the debt left by those golden players as they took off with bulging pockets. The incidents were within the past decade just prior to the downturn. Of course, golden boys/girls couldn't see that things would crash. But, any reasonable stance (based upon integrity, okay?) wold have foreseen that certain types of risks were not adequately handled. But, no, the context of the gaming rushes after reward (greedy accumulation) without proper regard to things related to the reality of near-zero. ... Much more can, and will, be said, in due time. In the meantime, the golden sack'ers (search) are archetypal in the world of economic misdeeds.

08/23/2013 -- To hear the market people talk, it's like they get a top going (balancing act), and everything is hunky dory. Oh yes, until the top topples and we have to clean up the mess. There are costs (to be discussed) that are not currently considered. An analog? People used to talk about clawbacks. That is, short-term decisions which had immediate success were rewarded with high pay. Then, when the crap became visible, the costs were pushed to the majority who had no say in the matter. That whole scenario is here, again, except the paybacks are of a nature that is not so visible. The costs have accumulated, though. The piper is going to come calling, again.

Modified: 07/22/2015

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