Latest Stories

• China Leaps to Second Spot in Global Science
• Weekend Readings: Chess, Rhodes Scholars, Trade, etc.
• Readings: Lawyers, Wealth, and Rare Earths
• Isildur1 and the Week That Changed Online Poker
• The Rise and Fall of Empires

 

Credit Default Swaps: Proudly the Tool of the Devil Again

Lots of people are staking out positions around (and mostly against) investor David Einhorn’s FT-reported anti-CDS musings in his latest investor letter. I agree with David in many ways – and his writing is as fun as usual – but I don’t accept all of David’s reasons (although I agree the ability to so directly influence the path to default can be problematic).

Two of my main CDS issues (which are fixable):

1. They are congenitally under-reserved , which creates asymmetric risks.
2. It is possible to write swaps (far) exceeding the notional value of the thing for which you are writing all the swaps. That’s … not good, like being able to create total policies far exceeding the value of a house, thus making it urgent to burn the house down as soon as possible.

Anyway, here is Einhorn’s original, followed by two takes on opposite sides:

• Einhorn against credit default swaps (FT)
• Ehrenberg: Deal with it Dave (IA)
• Yves: First, let’s kill all the credit default swaps (NC)

Feel free to find yet another position to stake out in comments.

 

Protectionism and the Chinese Box of the Renminbi

I have a commentary piece on Marketplace this coming week arguing that the U.S. dollar must be allowed by Asian central banks to depreciate against more currencies than the Euro. All of the longstanding trade and flow imbalances cannot be funneled through a single currency pair without creating even more grotesque trade & debt distortions.

And, as Michael Pettis points out, if the exchange shift cannot be made to happen to escape the Chinese box of a renminbi loose peg, the imbalances will end up in political hands with worrying protectionist implications:

In that sense the refusal of Asian central banks to permit the needed appreciation of their currencies against the dollar may end up having the same impact on the adjustment process of the overvalued currencies.  The 1930s seemed to show, according to the authors, that when their currencies could not adjust, countries became protectionist.  So if the overvalued dollar cannot adjust except against the euro, and if the already overvalued euro has to bear the brunt of any further adjustment, will American and European politicians be forced into the “second-best” option of trade protection?  No prizes for guessing what I think.

More here.

 

QOTD: John McCain’s 15% U.S. GDP Cut

No idea how I missed this wonderfully inflammatory Paul Samuelson quote from a few weeks back, but it’s a contentious keeper:

Had John McCain won [the 2008 election], the present G.D.P. in the United States would have been even lower than it is now by more than 15 percent.

More here.

 

Who Files for Bankruptcies?

 

Books of the Week

Some books I’ve been reading during my travels this week and that others might like – an eclectic list.

• Scroogenomics. The name more or less says it, but why you shouldn’t buy people presents for the holidays.
• The Great Cities in History. A lovely series of essays and meditation on what made great cities great through history.
• Boulevard of Broken Dreams. Josh Lerner’s new book on how government and venture capital should be kept far apart.
• Lords of Finance. I got stalled half-way through this many months ago, but finally finished it off this week. Probably my favorite book of 2009, and a lucid history of how central bankers nearly broke the world a hundred years ago.

 

Readings: Wind, Brazil, Tools, Complexity, and Ship-Tracking

• How Bernie Madoff made basket cases of his customers’ accounts (SI)
• Denmark a global leader in wind power (FP)
• Brazil’s rise to agricultural dominance (FT)
• Companies lining up for IPOs (E&Y)
• Live Ships Map - AIS - Vessel Traffic and Positions (MarineTraffic)
• Prezi - The zooming presentation editor (Prezi)
• 18 truths: The long fail of complexity (ZDNet)

 

Why is the Boston Marathon More Volatile Than the NYC Marathon?

As readers know, I’m fascinated by volatility and our response to it. In capital markets a little volatility is important, and a lot is dangerous – it can result in things flying apart, with unpleasant financial consequences.

In sports it works the other way around. Too little volatility in results and sports is boring. A little makes things more interesting; and a lot can make something compulsively watchable.

I was thinking of this during the recent New York marathon. Yes, an American won, which was a nice change, but the other thing that happened was that result unpredictability continued to fall. The rolling ten-year standard deviation of winning times has been declining for some time, as the following figure shows:

Now, here is the same figure for the Boston Marathon (over a slightly  longer period).

The Boston Marathon has consistently had higher volatility in its winning times than the Boston Marathon. Not only that, there has been a recent uptick in the results volatility, with the standard deviation trending up ward since 2004 or so.

We should expect declining standard deviations over time in these events, with the best athletes only differentiated by small-ish amounts of time. And that is, more or less, what is happening in the New York Marathon, but such is not the case – or at least hasn’t recently been the case – in the Boston Marathon. 

Why is the Boston Marathon different? Good question. Before positing a few – hillier course, more Kenyans, etc. --  I’ll throw it open. Thoughts?

 

QOTD: Lawyered Up

For a substantial portion of the American business and professional class, a book entitled "Life Without Lawyers" must surely conjure some of the same feelings evoked in faithful readers of the Harlequin romances, a sort of vicarious fantasy filled by the joy of liberation from burdens, strictures, and anxieties that have come to define quotidian existence. Such people are, in my experience, called clients.

Source: Charles N.W. Keckler, “Lawyered Up,” SSRN eLibrary (September 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1467183.

 

More Ws in the L Column?

Looks another W Hotel may be going into the L(oss) column. Joining the San Diego W, which defaulted on its loans this summer, may soon be the Manhattan Union Square W.

Debt backed by the W New York Union Square hotel in Manhattan, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, may be at risk of going into default after the travel slump forced it to cut room rates.

The $115 million loan backed by the property, a landmark Beaux Arts tower at Park Avenue South and 17th Street, has a moderate risk of default “given the asset’s weak financial performance and declining hotel fundamentals nationally,” credit rating firm Realpoint LLC said in a report on Oct. 28.

Apparently being hip and expensive and debt-ridden is bad in a marketplace where debt is hard to get and people are cutting back. Shocker.

More here.

 

Readings

• Chaotic evolution defines the market economy (FT)
• Bloomberg.com may charge up to $1,000 a year for some web content (PaidContent)
• Spotlight on eastern European currencies and gold (Mish)

 

Front-Running in Domain Bids

I wonder why Wall Street didn’t think of this first? Front-running taken to the domain name market:

Recently, SnapNames discovered that an employee had set up an account on the SnapNames system under a false name and, under this name, bid in SnapNames auctions.  This is a clear violation of our internal policy and was not approved by the company.  We deeply regret that this conduct has impacted our customers.

Extent of impact

This conduct affected a small percentage of SnapNames auctions:

    * Bidding affected approximately five percent of total SnapNames auctions since 2005, most of which occurred between 2005 and 2007.
    * The incremental revenue from the bidding represented approximately one percent of SnapNames’ auction revenue since 2005.

No matter the level of impact, SnapNames takes this matter extremely seriously.  When the matter was discovered, the company immediately closed the account in question and began a thorough investigation.  The employee has also been dismissed from the company.

SnapNames further discovered that, on certain recent and limited occasions, when the employee won an auction, the employee secretly arranged to refund from SnapNames to the fictitious account a portion of the winning bid amount.

 

Market P/Es: Seven Canadas for One ChiNext

In a quick look around the world at market price/earnings multiples after the launch of the ChiNext wild-wild west exchange in China, the league tables have really changed. The impossible has happened, with the outrageously expensive Shanghai Composite newly looking (relatively) cheap. Gosh.

I’m particularly fond of how 20 of the 28 ChiNext companies fell by the exchange maximum 10% today, that coming after 23 rose the maximum 10% on the previous trading day.

While some are pointing to the new ChiNext listings as an example of China celebrating growth entrepreneurs, I’m not convinced. The early listed companies are a grab bag of utilities, movie companies, pulp & paper, and machinery makers.  And don’t even get me started about the low listing hurdle. As Andy Xie has said, “This is a V.I.P. table built on top of a casino”.

 

U.S. is a Net Oil Exporter, Sort Of

Interesting chart from the EIA/DOE showing that the U.S. is a net exporter of oil, at least of the distillate product kind. It is a funky reflection of the kinds of distortions in world oil markets with wholesale distillate prices staying higher than gasoline, in part of regional subsidies in Asia.

[The U.S. as net importer of distillates] trade pattern changed significantly in the spring, summer, and fall of 2008 as wholesale prices for distillate soared above those for gasoline. Distillate prices have rarely been higher than gasoline during the summer months but, the summer of 2008 saw an unprecedented and sustained premium for distillate. A variety of factors were behind the unusually high margins. In South America, price controls were limiting Argentina’s production and export of natural gas, and a severe drought in Chile was reducing its hydroelectric generation. Distillate fuel for electrical generation was a convenient short-term substitute for these shortages. Prices began to rise quickly in the face of this extra demand, but several prominent distillate consumers, including China and India, shielded their domestic consumers from the increased costs through fuel subsidies and price controls. The normal economic process of higher prices encouraging reduced consumption was therefore muted or absent in these countries.

 

Gold as a Dollar Thing

Gold in three currencies this past year: the Euro, Canadian dollar, and U.S. dollar.

 

Weekend Reading

A few links from my weekly weekend reading column:

• There is no “new normal”: This time isn’t different (Forbes)
• Why world's post offices are ailing (The Globe and Mail)
• Changing distillate export patterns (EIA)
• BP chief Tony Hayward says oil industry mega mergers are dead (Times Online)
• Country Clubs: Stuck in the Rough (BusinessWeek)
• Fertility and living standards: Go forth and multiply a lot less (The Economist)