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Paul Krugman, Brookings, It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap, here.
THE LIQUIDITY TRAP-that awkward condition in which monetary policy loses its grip because the nominal interest rate is essentially zero, in which the quantity of money becomes irrelevant because money and bonds are essentially perfect substitutes-played a central role in the early years of macroeconomics as a discipline. John Hicks, in intro- ducing both the IS-LM model and the liquidity trap, identified the assumption that monetary policy is ineffective, rather than the assumed downward inflexibility of prices, as the central difference between Mr. Keynes and the classics. ‘ It has often been pointed out that the Alice in Wonderland character of early Keynesianism-with its paradoxes of thrift, widows’ cruses, and so on-depended on the explicit or implicit assumption of an accommodative monetary policy; it has less often been pointed out that in the late 1930s and early 1940s it seemed quite natural to assume that money was irrelevant at the margin. After all, at the end of the 1930s interest rates were hard up against the zero con- straint; the average rate on U.S. Treasury bills during 1940 was 0.014 percent.
Peter Woit, Not Even Wrong, Number Theory News, here. Woit’s link to Caroline Chen’s The Paradox of the Proof (below) is pretty good for a Mochizuki/ABC conjecture summary and update.
A special seminar has been scheduled for tomorrow (Monday) at 3pm at Harvard, where Yitang Zhang will present new results on “Bounded gaps between primes”. Evidently he has a proof that there exist infinitely many different pairs of primes p,q with p-q less than
Whether this proof is valid should become clear soon, but there still seems to be nothing happening in terms of others understanding Mochizuki’s claimed proof of the abc conjecture. For an excellent article describing the situation, see here.
Ingrid Daubechies, What’s new, Planning for the World Digital Math Library, here.
This guest blog entry concerns the many roles a World Digital Mathematical Library (WDML) could play for the mathematical community worldwide. We seek input to help sketch how a WDML could be so much more than just a huge collection of digitally available mathematical documents. If this is of interest to you, please read on!
Brad DeLong, Grasping Reality, Moby Ben, or, the Washington Super-Whale: Hedge Fundies, The Federal Reserve, and Bernanke-Hatred, here. So, when History is written about the London Whale – he was just on the wrong side of a convergence trade in CDX IG 9 identified by a bunch of smart hedge fund folks. I guess that’s what they mean when they say, by not knowing history you are condemned to repeat it?
In February 2012, a number of hedge fund traders noted one particular index–CDX IG 9–that seemed to be underpriced. It seemed to be cheaper to buy credit default protection on the 125 companies that made the index by buying the index than by buying protection on the 125 companies one by one. This was an obvious short-term moneymaking opportunity: Buy the index, sell its component short, in short order either the index will rise or the components will fall in value, and then you will be able to quickly close out your position with a large profit.
But February passed, and March passed, and April rolled in, and the gap between the price of CDX IG 9 and what the hedge fund traders thought it should be grew. And their bosses asked them questions, like: “Shouldn’t this trade have converged by now?” “Have you missed something?” “How much longer do you want to tie up our risk-bearing capacity here?” “Isn’t it time to liquidate–albeit at a loss?”
So the hedge fund traders began asking who their counterparty was. It seemed that they all had the same counterparty. And so they began calling their counterparty “the London Whale”. They kept buying. And the London Whale kept selling. And so they had no opportunity to even begin to liquidate their positions and their mark-to-market losses grew, and the risk they had exposed their firms to grew.
So they got annoyed.
And they went public, hoping that they could induce the bosses of the London Whale to force him to unwind his possession, in which case they would profit immensely not just when the value of CDX IG 9 returned to its fundamental but by price pressure as the London Whale had to find people to transact with. And so we had ‘London Whale’ Rattles Debt Market, and similar stories
The London Whale was Bruno Iksil. He had been losing, and rolling double or nothing, and losing again for months. His boss, Ina Drew, took a look at his positions. They found they had a choice: they could hold the portfolio and thus go all-in, or they could fold. They could hold CDX IG 9 until maturity–make a fortune if a fewer-than-expected number of its 125 companies went bankrupt, and lose J.P. Morgan Chase entirely to bankruptcy if more did. Or they could take their $6 billion loss and go home. They could either take their losses, or sing “Luck, Be a Lady Tonight!” and bet J.P. Morgan Chase on a single crapshoot. After all, what could they do if the bet went wrong and they had to eat losses at maturity? J.P. Morgan Chase couldn’t print money. So Drew stood Iksil down, and the hedge fund traders had their happy ending.
Matt Levine, DealBreaker, Apple Sold Some Bonds, here.
So those rates are low, no? Assuming a 35% tax rate hahahah, the after-tax cost of the 30-year is around 2.5%, and the average after-tax cost is around 1.25%, compared to Apple’s (entirely after-tax) dividend yield of 2.75%.2 So every $1,000 bond they issue to buy back stock saves them around $15 a year in cash that they’d otherwise be paying out to stockholders.
Jon Shazar, DealBreaker, The CBOE Will Make Up Those Three-Plus Hours To You – And Then Some, here.
The Chicago Board Options Exchange said preparations to extend trading hours led to last week’s shutdown of one of the largest U.S. stock-options markets, even though staff were aware of potential problems ahead of time.
The exchange operator said Monday in a note to clients that an internal review left it “fully confident” that it had addressed the software bug, though it would be assessing how it handled the 3½-hour outage last Thursday….
CBOE said the root cause of the outage lay in “preliminary staging work” in preparation for longer trading hours on CBOE’s futures and options markets, according to the notice sent by CBOE executives….
The staging work being done at CBOE “exposed and triggered a design flaw in the existing messaging infrastructure configuration,” according to the notice. People briefed on the CBOE’s investigation said late last week that the problem was seen related to the exchange’s software for the handling of complex, multipart options orders. A spokeswoman for CBOE declined further comment Monday.
Eric Lipton, NYT, Banks Resist Strict Controls of Foreign Bets, here.
Banks and overseas regulators are resisting an agency proposal, intended to go into full effect as early as mid-July, that would require overseas offices of American-based banks, foreign institutions and hedge funds to turn over information on foreign trades if they involve United States customers, or are guaranteed by a financial institution with American ties, requirements that the industry calls redundant and excessive.
Kissel and Malamut, JPM, Feb 2005, Understanding the Profit and Loss Distribution of Trading Algorithms, here.
To best understand the algorithmic deci- sion making process, however, it is im- portant to understand the basics behind transaction cost management. Seminal transaction cost research is primarily due to Treynor (1981), Perold (1988), Ber- kowitz, Logue, & Noser (1988), Wagner (1990), and Hasbrouck (1991). More re- cently, however, Bertsimas & Lo (1996), Almgren & Chriss (1999), and Kissell, Glantz, and Malamut (2004) expanded this work to provide a decision making framework to manage transaction costs. Accordingly, this work now serves as the basis for algorithmic decision making.
Felix Salmon, medium.com, The Bitcoin Bubble and the Future of Currency, here.
A few days ago, the value of all the bitcoins in the world blew past $1 billion for the first time ever. That’s an impressive achievement, for a purely virtual currency backed by no central bank or other authority. It’s also temporary: we’re in the middle of a bitcoin bubble right now, and it’s only a matter of time before the bubble bursts.
Simon Johnson, NYT, Economix, The Debate on Bank Size is Over, here. Sort of plausible interpretation.
While bank lobbyists and some commentators are suddenly taken with the idea that an active debate is under way about whether to limit bank size in the United States, they are wrong. The debate is over; the decision to cap the size of the largest banks has been made. All that remains is to work out the details.
Ellis Hamburger, The Verge, Appple’s broken promise: why doesn’t iCloud ‘just work’? here.
“I’ve rewritten my iCloud code several times now in the hopes of finding a working solution,” wrote developer Michael Göbel in a blog post, and “Apple clearly hasn’t.” The problem is this: Apple has failed to improve the way it syncs databases (“Core Data”) with iCloud, yet has continued to advertise and market iCloud as a hassle-free solution.
“The promise of iCloud’s Core Data support is that it will solve all of the thorny issues of syncing a database by breaking up each change into a transaction log. Except it just doesn’t work,” said a very prominent developer who asked not to be named in order to stay in Apple’s good graces. iCloud apparently chokes hard on the databases it’s supposed to be so proficient at handling. From a user perspective, this means that despite a developer’s best efforts, data disappears, or devices and data stop syncing with each other.
Charles Hugh Smith, of two minds.com, The Tailwinds Pushing the U.S. Dollar Higher, here.
Some analysts mistakenly believe that Fed policies are aimed at boosting the relatively modest export sector (which we have already seen is a convoluted mess of globally supplied parts, sales in other currencies, etc.) from 13% to 14% of the domestic economy.
This overlooks the fact that the most important export of the U.S. is U.S. dollars for international use. I explained some of the dynamics in Understanding the “Exorbitant Privilege” of the U.S. Dollar (November 19, 2012) and What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012).
Galen Burghardt and Terry Belton, The Treasury Bond Basis, here.
Now in its third edition, The Treasury Bond Basis is the mandatory reference text for Treasury bond and note futures trading rooms around the world. This updated edition reflects the numerous market changes, chief among them the Chicago Board of Trade’s decision to switch from an 8 percent to a 6 percent conversion factor. Revisions include greater detail on hedging and trading, updated explanations of options valuation and short delivery options, and discussion of global bonds futures trading and applications.
Willmott, Forums, here.
Chris Angelini, Tom’s Hardware, Core i7-4770K: Haswell’s Performance Previewed, here. OK, where do I get my Haswell server? I like the part where they say floating point is almost twice as fast (as ivy bridge) which might be important (unless you compile with gcc/AVX in which case, no change).
The integer test employs the AVX2 instruction set on Intel’s Haswell-based Core i7-4770K, while the Ivy and Sandy Bridge-based processors are limited to AVX support. As you see in the red bar, the task is finished much faster on Haswell. It’s close, but not quite 2x.
Floating-point performance also enjoys a significant speed-up from Intel’s first implementation of FMA3 (AMD’s Bulldozer design supports FMA4, while Piledriver supports both the three- and four-operand versions). The Ivy and Sandy Bridge-based processors utilize AVX-optimized code paths, falling quite a bit behind at the same clock rate.
Why do doubles seem to speed up so much more than floats on Haswell? The code path for FMA3 is actually latency-bound. If we were to turn off FMA3 support altogether in Sandra’s options and used AVX, the scaling proves similar.
Buchheit and Gulati, SSRN, Walking Back from Cyprus, here. via Salmon. A proposal to sell the uninsured depositors 5Y CDs and leave the insured depositors alone.
On Friday night, March 15, 2013, European leaders trespassed
on consecrated ground. They insisted that Cyprus impose losses –
euphemistically dubbed a “solidarity levy” — on insured depositors with
Cypriot banks as a condition to receiving EU/IMF bailout assistance.
Entering Friday’s meeting, the leaders had four options on the table, none of
(i) Give Cyprus a complete bailout (estimated to cost €18
(ii) Restructure the outstanding Cypriot bonds, €4.4 billion of
which are governed by Cypriot law and €3.8 billion by
(iii) Haircut excess deposits in the Cypriot banking system;
that is, deposits in excess of the €100,000 minimum
covered by the local deposit insurance scheme. These
represent about half of the total deposit base.
(iv) Haircut the insured deposits.
The European leaders chose options (iii) and (iv). Insured
depositors will suffer a 6.75% loss on their deposits; amounts in excess of
that level will be subject to a solidarity contribution of 9.9%. Holders of
Cypriot sovereign bonds will emerge unscathed. The next bond maturing on
June 3, 2013 in the amount of €1.4 billion — a large chunk of which is reputed
to have been bought by international hedge funds over the last six months at
prices ranging from 70-75 cents on the euro — will be paid out at 100 cents
on the euro in about ten weeks. Each depositor in a Cypriot bank, large and
small, will be making a solidarity contribution toward that payment to
Philip Greenspun, SQL for Web Nerds, here. Ullman and Widom have tons of links.
After writing a preface lampooning academic eggheads who waste a lot of ink placing the relational database management system (RDBMS) in the context of 50 years of database management software, how does this book start? With a chapter placing the RDBMS in the context of other database management software.
Why? You ought to know why you’re paying the huge performance, financial, and administration cost of an RDBMS. This chapter doesn’t dwell on mainframe systems that people stopped using in the 1970s, but it does cover the alternative approaches to data management taken by Web sites that you’ve certainly visited and perhaps built.
The architect of any new information system must decide how much responsibility for data management the new custom software should take and how much should be left to packaged software and the operating system. This chapter explains what kind of packaged data management software is available, covering files, flat file database management systems, the RDBMS, object-relational database management systems, and object databases. This chapter also introduces the SQL language.
Lamb, et.al., The Vertica Analytics Database: C-Store 7 Years Later, here.
This paper describes the system architecture of the Vertica Analytic Database (Vertica), a commercialization of the design of the C-Store research prototype. Vertica demonstrates a modern commercial RDBMS system that presents a classical relational interface while at the same time achieving the high performance expected from modern “web scale” analytic systems by making appropriate architectural choices. Vertica is also an instructive lesson in how academic systems research can be directly commercialized into a successful product.
Felix Salmon, Reuters, The Cyprus precendent, here. This has ugly potential.
I stuck my neck out in January, saying that Cyprus was “certain” to default. After all, the Europeans weren’t willing to come up with the €17 billion needed to bail the country out, and EU economics commissioner Olli Rehn told the WSJ’s Stephen Fidler that Cyprus would have to restructure its debt. But now the bailout has arrived, and — in something of a shocker — there’s no default. Instead, €5.8 billion of the bailout is going to come directly from depositors in Cyprus’s banks, in the form of what the EU is calling an “upfront one-off stability levy”.
Don’t for a minute believe that this decision is part of some deeply-considered long-term strategy which was worked out in constructive consultations between the EU, the IMF, and the new Cypriot government. Instead, it’s a last-resort desperation move, born of an unholy combination of procrastination, blackmail, and sleep-deprived gamesmanship.
The details aren’t entirely clear yet: we’re told that deposits of more than €100,000 are going to have to pay a tax of 9.9%, for instance, but it’s not obvious whether that applies to all of the large deposit or just to the amount over €100,000. And there’s still a real chance that the Cypriot parliament could scupper the whole deal. But for the time being, everybody’s going on the assumption that the deal will go through, that Cyprus will get its €10 billion bailout from the EU, and that everybody with a Cypriot bank account in Cyprus (a group which includes members of the UK military) will see their accounts taxed by at least 6.75%.
Henry Blodget, BI, This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus…, here. So, cash deposits near the cash deposits of foreign oligarchs needs to return more than the risk free rate – seems like a big data problem. Good thing that Pink I is thinking about modern Cash Registers because they will be in high demand when you need a supercomputer to run the asset allocation algorithm to deposit your paycheck.
Here’s the short version of what’s happening:
Cyprus’s banks, like many banks in Europe, are bankrupt.
Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.
The Eurozone powers-that-be gave Cyprus a bailout–but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.
The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.
Not the bondholders.
The depositors. The folks who had their money in the banks for safe-keeping.
XKCD, Ineffective Sorts, here.