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  • Artful Dodger [View article]

    Excluding Operation Twist, which didn't expand the FED's balance sheet, the last two times the FED's stimulus programs -QE1 and QE2- have ended, the ten year has very briefly rallied (3 days and 1 day, respectively), as it would be expected, but then have proceeded to drop (150bps over 6 months and 155bps over 3 months, respectively) which, I believe, is the opposite of what conventional doctrine would indicate.

    I would like to know why do you think this has been the case and, more importantly, whether you think it will happen again this time around. Finally, do you see any difference between the 10 year and the longer dated bonds? Thanks.
    Dec 20 12:38 PM | Likes Like |Link to Comment
  • Artful Dodger [View article]
    Great article, Mike. Happy holidays!
    Dec 20 11:54 AM | 1 Like Like |Link to Comment
  • Defensive [View article]
    Yes, writing a public blog can be difficult. But keep it up, Mike, we need serious people writing intelligent pieces. The only advice I can offer, one which, I confess, is almost impossible to follow sometimes, is to have the outmost restrain and simply ignore the unreasonable posters and only address the reasonable ones. Unreasonable people, when ignored, tend to get furiously mad, but eventually, just give up and leave.

    The other option, which I found worked better for me was the following: I used to use a very short prewritten statement that I would post as a reply to those types of posters every single time, without exception. Something along the lines of "I will be happy to reply to you and address your concerns if you post in a civil and respectful way. See you next time".
    Dec 10 06:54 PM | 2 Likes Like |Link to Comment
  • Moving Goalposts [View article]
    The market is a zero-sum game as much as the market is efficient. The market is neither.

    Theoretically and from a purely monetary point of view the market only becomes a zero-sum game if it were to go down (and in some case up) all the way to the various IPO prices of the stocks. In other words, only it the market were to revert back to its starting point. Otherwise, it is theoretically possible for all to actually make money in it. As long as there is wealth creation, the market is not a zero-sum game.

    Let's disregard inflation (and any other external factors) and imagine a market of only one stock with an starting trading price of 100, which goes up, and then up and and down, but never back down to 100. Some will win, some will lose, but as a group there is wealth creation and hence, the market (which is the group) is not a zero-sum game. The market is up and the market participants, as a group are up more than they were when the market started. There is new wealth were there was none before.

    Now, repeat that process thousands of times, for the thousands of stocks, add them up together, and you will see that the market is not a zero-sum game.

    From a more practical point of view, though, what is most likely to happen this time around is that the market will, at some point, reverse from its all-time highs, institutional and professional investors will get out first and retail investors will take the brunt of the losses. This is, naturally, what usually happens and it may be, to a degree, unavoidable. Unfortunately, though, the Fed is compounding the problem and the future losses for the retail investors.

    PS: "for every winner (buyer, these days) there's a loser (seller, these days)."

    Actually, no. I know it sounds obvious, but the seller only truly loses if it sells below his original price. If it sells above it, it may be leaving potential profits on the table, but it isn't actually losing any money. So, if there ever was a market that would, inexorably, go up, the losses would come from short sellers (if there were any). Long, investors, as a group, would always make money.
    Nov 15 05:29 PM | Likes Like |Link to Comment
  • Moving Goalposts [View article]
    Very good post, Mike.

    One should be happy with the market going up and up, but not like this. Does it matter? It may not, but it should. What happens when it stops working? I am guessing the Fed is betting they can engineer a soft pull back and won't mind a 10% correction if they have pushed the markets up close to 30%. They will see it as a success. And, perhaps, it would be. If they manage to pull it off.

    I doubt it.

    One problem people don't even consider, but will prove costly, sooner or later, is that the Fed is taking the parameters and intelligence away from the markets, and that's terribly harmful. Intelligence and knowledge should be compensated in the market place but the Fed takes that away by indiscriminately melting up the markets, which diminishes the hard earned advantages of the best traders and institutions.

    Yes, I would like everyone to make money, but at the end of the 90s we learned what happens when you have everyone drive a Formula 1 car at full speed, allowing them to think they are in total control, and then take away the automatic pilot.

    The crash will happen again, and this time around, the Fed is providing the high-octane fuel and the blinders to the pilots. That seems suicidal to me.
    Nov 15 09:52 AM | 2 Likes Like |Link to Comment
  • The Solar Revolution: Part 3 [View article]
    Smaller in terms of area, but The Netherlands it is an important European country, which influences European policy, and it has a large economy that punches way about its weight. Is Alaska more important than NY because it is so much bigger?
    Nov 12 04:24 PM | 1 Like Like |Link to Comment
  • The Solar Revolution: Part 3 [View article]

    We already own many renewable ETFs such as: PBD, PBW, PUW, PZD, QCLN, ICLN, FAN, GEX, TAN and KWT. In your opinion, which ETF or ETFs better represent the future of solar. Any preference from an investment point of view? Thanks.
    Nov 12 08:23 AM | Likes Like |Link to Comment
  • The Solar Revolution: Part 3 [View article]
    Nice series of articles, Jonathan.

    Some posters have written about the increasing cost of solar installations at home. In The Netherlands municipalities are promoting the use of solar by, amongst others, paying for the installation at homes. They also promote the use of electric cars by building an electric plugging post in front of your home if you buy an electric car. Similar schemes are being implemented in other European countries. As you may imagine, as a result of these policies, the use of these technologies will, most probably, be higher in Europe than in other places.

    This is to say that scalability, installed capacity and costs depend on many factors, which change from country to country and region to region. Make no mistake about it, in Europe, though, the trend towards renewables is crystal clear.
    Nov 12 08:19 AM | 1 Like Like |Link to Comment
  • Emerging Competition Threatens Apple In 2014 [View article]
    "Apple loses money on everything except iPhones."

    You didn't just write that. Did you? Yes you did. Oh well, after that, forget about taking your post seriously.
    Oct 31 07:33 PM | 4 Likes Like |Link to Comment
  • The Solar Revolution: Part 1 [View article]
    Good job, Jonathan. Nice post.
    Oct 29 05:23 PM | Likes Like |Link to Comment
  • Is Inflation Of 2% Enough For You? [View article]
    "To the extent that discussion stays academic, it’s not worrisome. Navel-gazing is an occupational hazard of being a professional economist, after all."

    What's the oldest profession?

    No, not THAT one. It is being an economist.
    God created the universe from chaos, but we needed economists to create chaos in the first place.
    Oct 29 11:37 AM | 3 Likes Like |Link to Comment
  • Battle Lines Drawn [View article]
    Not everyone is fooled by what's going on. This is an interesting interview of hedge fund executive Mark Spitznagel: "The stock market is trading at unsustainable levels that could eventually lead to a major sell-off, with a possible 40 percent drop in stock prices"
    Oct 23 05:10 PM | 1 Like Like |Link to Comment
  • Battle Lines Drawn [View article]
    Absolutely, just look at Venezuela.

    I like the Icarus imagery. Sadly, other than staying completely out of the markets, it doesn't seem possible for investors to have any real control over not being Icarus. The Fed is providing the wings and the hot air to fuel the market's lift. Investors are just there for the uncontrollable ride. Shorting is all but impossible because the entire spectrum is artificially pumped up. This will only make things worse, as the market loses a healthy tool to stay within reasonable levels.

    QE made sense to get over the crisis. Nowadays, though, the Fed seems enamored with the idea that it can keep on making markets go higher and rates lower. It will work, until it doesn't, and when that day comes, a monumental shock will be delivered. But the Fed seems to think that it can slowly pull away without causing said shock. Perhaps, but, since it keeps on delaying the taper, it is getting too late for that.
    Oct 23 03:41 PM | 1 Like Like |Link to Comment
  • Assessing The Real Risk Of A U.S. Debt Default [View article]
    "If President Obama's claims had more credibility, yields on U.S. Treasuries would have risen in response."

    Good article but incorrect causality on this specific point. The more likely possibility is that the markets do give full credibility to President Obama claim, but think that Republicans will back down eventually, as the majority of the nation would blame them and not President Obama for any harm caused.
    Sep 30 11:06 AM | 3 Likes Like |Link to Comment
  • Food Fight At The Fed! [View article]
    Regarding the liquidity issues, as I said, I agree that there is less liquidity in the marketplace. I am not disputing that. On my previous posts I stated what the banks say about the causes, and what I think about what they claim.

    regarding the rest, I think we differ on one main and crucial point: You write "market-making IS proprietary trading." Yes, it is, in the straight forward sense that the market maker takes the opposite position of the customer, for its own book. So, once it hits his book and he has to trade out of it, you would like to call it proprietary trading. But not in the pure sense of a proprietary trading definition, which has to do with intent and the discretionary and speculative proactive trading action taken by the trader.

    You yourself have stated this when you write "A buyer goes to a dealer, who would be willing to sell because he thinks a seller will show up tomorrow."

    Don't see the difference? The litmust test is simple. Who starts or proposes the trade? Whose idea is in the first place? If it is the costumer's, then it is market making.

    Let me be clear that I am talking specifically about the genesis of the first trade (because that's were you can see the aim of the behavior and the difference between the two), not about getting out of it, which may necessitate a dealer (but only a dealer-not a regular market maker who simply posts his bid or offer in the marketplace), to directly offer the trade to a customer.

    So, a market maker receives a proposition from a client (I want to buy, would you sell? Or the opposite) and chooses to accept or decline said proposition. The position of the market maker is passive in this regard, and it is directly depended on what customers do or want to do. In short, it is dependent on the customers intent. When the market making is done electronically (without direct human interaction), then it is completely passive (in its initiation) and fully dependent on the customer's intent. In fact, the very essence of market-making, which is to provide liquidity to the market place, depends on this key principle. Break it and you destroy the implicit trust built into the system.

    Think of the extreme example of the specialist who has to take all orders before the market opens and creates a market by posting a starting crossing price. The specialist takes all orders and it is 'forced' to take the other side of whatever crossing surplus order-flow there is. Yes, the specialist can move the price up or down but he has no discretion, at all, on size or directionality. That comes from the aggregate of the costumers's orders (and sadly, even this has been abused by some specialists who move the price beyond the actual equilibrium dictated by the customers' order-flow to make money on the, then, specialist's forced bounce or retracement).

    On the other hand, the proprietary trader has an idea and proactively initiates the trade. The proprietary trader's decision is fully discretionary (the market maker's is not, as I have just explained and speculative.

    Now, the problem with banks mixing the two of them together is that they behaved like proprietary trading entities but used their commercial bank customers as counter-parties. As proprietary traders they had an idea, acted in a discretionary and speculative way, but instead of going to the open market place to implement the trade, they sold it to the bank's customers. Why would they do that? Because they have captive costumers with whom the can make easy money.

    Well, let's recap. The bank initiates the trade (in many instances even creates and sells the instrument itself), goes to its customers, proposes the trade and takes the customers' opposite side. Again, why would they do that? Now, simple logic dictates that there are only two possible scenarios and outcomes here: Either the bank has the customer's best interest at heart, as it would be its obligation as a sell-side entity, or it has its own best interest at heart as it would the norm for a buy-side entity. It is impossible to do both at the same time, in the same transaction, and with the same costumer, if the bank takes the opposite side of the trade!

    Since it is clear that the bank would not initiate itself, motu proprio, a losing trade, it is only possible that the bank knows full well that it will, in all likelihood, make money with its trade and, hence, that it is purposely and knowingly selling a product (or proposing a trade) to its customer which will lose them (the customer) money.

    So, surprise, surprise, that is exactly what has happened numerous times in the last 15 years. Expected rational, albeit immoral, behavior.

    The Volcker rule would help prevent this, and more, from happening and, as such, it is, in my opinion, inherently good. Now, unfortunately the transformation that has taken place of the original Volcker rule, which was very straight forward, and the war around the necessary definitions (what is 'necessary risk or mitigating risk', for instance) has made the implementation a bit of a nightmare. But, as I said before, this is mainly the banks' fault, as the have done everything possible to oppose or stop the process.

    It has been like the tobacco companies that used to be part of finding a "solution" with the government but, instead, did everything they could to oppose any useful changes.

    One last thing. Volcker may not care what you think but I do. I haven't changed my mind, but I am always willing to change my mind if the argument provided proves to be better than my own.
    Sep 24 07:01 PM | 2 Likes Like |Link to Comment