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According to John Fawcett of startup Quantopian, there are roughly 10,000 quants worldwide. (See the Forbes article covering his company, which looks a little like QuantDom meets Kaggle.Com). The good news is that Nassim Taleb has educated almost all of them:
Clifford S. Asness, Financial Analysts Journal, My Top 10 Peeves, here. Very entertaining. The HFT number 8 Peeve is pretty good.
The author discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors.
Cringely, I, Cringely, Why Intel wants to be everyone’s chip maker, here. Cringely pushing the analysis that Intel go to the lower margin foundry business so that they get a shot to buy the Next Big Thing early with their cash reserves.
At Intel’s annual shareholders’ meeting last week the company talked about moving strongly into mobile chips and selling its stillborn OnCue over-the-top video streaming service, but the most important story had to do with expanding Intel’s manufacturing capacity. This latter news is especially important because if you look at the square footage of 14 nanometer fab facilities Intel says it will be bringing online in the next two to three years it appears that the company will shortly have more production capacity than all the rest of the semiconductor industry combined.
Not just more 14 nm production capacity, we’re talking about more total production capacity than all Intel competitors together.
This is fascinating news for several reasons. First, at $5+ billion per fab you don’t add 3-4 new ones without a darned good reason for doing so. Second, it takes so long to plan and build these plants that this part of Intel’s strategic plan had to have been in the works for years before the company ever mentioned it in public. So it’s not like new Intel CEO Brian Krzanich moved into his office and said, “Let’s build some new fabs.”
Rick Bookstaber, Live to Eat, Eat to Live, here.
In a recent New York Times opinion piece, Paul Krugman assessed the possibility that the economy is in a new, constant state of mild depression, and suggests several reasons why this might be occurring, including slowing population growth and a persistent trade deficit.To this I would like to suggest another one, which has been a topic of some of my previous posts: We simply demand less in terms of the consumption of produced, brick and mortar types of goods because that is not where we are spending our lives. Granted, we need a place to live, food to eat, a car to get around, but now we are not living to eat, we are eating to live; we are living to do things that do not require a huge industrial machine. (I won’t even get into the point that insofar as we require the output of the industrial machine, it is now being run with less labor required).
James C. Scott, London Review of Books, Crops, Towns, Government, here
It’s a good bet a culture is in trouble when its best-known intellectuals start ransacking the cultural inventory of its ancestors and its contemporary inferiors for tips on how to live. The malaise is all the more remarkable when the culture in question is the modern American variant of Enlightenment rationalism and progress, a creed not known for self-doubt or failures of nerve. The deeper the trouble, the more we are seen to have lost our way, the further we must go spatially and temporally to find the cultural models that will help us. In the stronger versions of this quest, there is either a place – a Shangri-la – or a time, a Golden Age, that promises to reset our compass to true north. Anthropology and history implicitly promise to provide such models. Anthropology can show us radically different and satisfying forms of human affiliation and co-operation that do not depend on the nuclear family or inherited wealth. History can show that the social and political arrangements we take for granted are the contingent result of a unique historical conjuncture.
Matt Levine, Bloomberg, Today in Why Aren’t More Bankers in Jail, here.
Really everyone who messes up at a bank should be stripped of a knighthood and we should knight everyone right now so as to be prepared.
The Epicurean Dealmaker, Our Glassy Essence, here. I interpret this to mean hold Patrick Beverley on the Lead Farmers and see what happens in the next game. I’ll play Bargs for now, unless the game is with Pacers, SA, LAC, or Heat, until Tyson Chandler gets back from his broken leg. Pencil Bargs in for 34 min per game and at least 5 REB. Shit’s about to get scientific.
Press a practicing scientist, O Dearly Beloved, to explain what she does for a living and you will often (usually?) find her describing an extremely elaborate, well-constructed, and beautiful intellectual apparatus built to great height and breadth upon subtly shifting sands. As a von Neumann prediction machine, it is remarkably successful, at least in certain well-defined domains (e.g., quantum physics, astronomy), which she will no doubt point to with pride. Look a little closer, however, and you will begin to see lacunae, cracks, and jury-rigged joints papered over with vagueness and contradiction, especially at the gaps between different scientific disciplines or within the same discipline at different scales. Certain sections of the apparatus (like cosmology) seem to have abandoned their purported identity as prediction machines entirely and devolved into nebulous hypothesizing and vague handwaving. Others barely seem to merit the designation “science” at all. Look longer, and you begin to notice that virtually every section of the beautiful edifice is covered with permanent scaffolding and safety netting, with slightly dusty, battered “Under Construction” signs creaking forlornly in the breeze.
Matt Levine, Bloomberg, Finance Ph.D.s Are Pretty Good at Finance If They Do Say So Themselves, here. Shades of Mr. Snipes in Passenger 57. Bargs killed it last night for the Knicks, does he have a Ph.D.?
And so the field is a parade of papers that identify factors reliably associated with statistically significant outperformance. But last month Ranadeb Chaudhuri,Zoran Ivkovich, Joshua Pollet and Charles Trzcinkawon. They wrote the most perfect possible finance paper, so everyone else can stop. Well, actually, they can’t, because Chaudhuri et al.’s conclusion is “the world needs more finance papers.” Sort of. Here (viaTyler Cowen) is the abstract:
Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap.
Felix Salmon, Reuters, When bonds don’t trade, here. Lots of fixed coupons folks cannot easily trade out of. Maybe they will use swaps?
This chart doesn’t just cover Citigroup, it covers all bond broker-dealers. They massively increased their inventory of bonds during the 2000s bubble — but so did everybody else: total credit assets were raising substantially over that period. Then, after the financial crisis, came the great divergence. Broker-dealers retreated from the market, even as investors continued to seek the safety of bonds. So while broker-dealers were about half the size of the credit mutual fund industry in 2007, according to the quantity of assets they owned, today they’re only about 1/20th of the size. And those broker-dealers are still the only real liquidity providers in the market. If you want to buy or sell a bond on the secondary market, there’s really only one way to do it: phone a bunch of broker-dealers, ask them to make you a market, and either accept the best price you find, or don’t.
Lee’s article makes a very strong case that the only way out of this problem is for buy-side institutions to start trading directly with each other, since the broker-dealers have enough to be able to provide good service only to their very best clients. But neither of the two buy-side bond market giants (Blackrock and Pimco) seem to have been able to make such a system work, and although the MarketAxess system is growing fast, there isn’t going to be any fundamental change unless and until bond investors start making buy/sell markets of their own. Which is simply not going to happen: bond investors don’t tend to think in terms of opportunistic trading, precisely because their portfolios are so illiquid. What’s more, the ability to make a two-way market is contingent on the ability to buy one name when you sell another, which is not something anybody can reliably count on being able to do any more.
In other words, we’re living through a vicious cycle: the less liquid the market gets, the less ability there is for anybody to make markets, which in turn just worsens the liquidity problem. And things are only going to get worse still if and when QE goes away.
Dan Amira, New York Magazine, James Dolan Wants the Knicks City Dancers to Be Classier, here. That’s why Lead Farmers have no Knicks on the roster – not enough Classy Dancing. Update: well if Tyson Chandler is out for 6 weeks and there is going to be classy dancing at MSG then the Lead Farmers will take the new starting center for your New York Knickerbockers … Bargs off the wire.
The source said there is a movement to upgrade the routines by the popular Knicks City Dancers to make them less like “regular cheerleaders.”
“We’re in the process of a rebranding of the Knicks City Dancers,” the source said. “We’re looking at making them bigger and better so they’re not just regular cheerleaders.” The Garden source added the plan is to make the routines more “classy,” citing the tap-dance number that was performed Sunday night.
Cardiff Garcia, FT Alphaville, The downsides of quantitative easing, Cardiff Garcia smackdown watch, here.
Brad DeLong asks (politely) why oh why can’t we have better QE weblogging, and then issues a challenge:
“Toward the end of an otherwise very good think piece, the intelligent and thoughtful Cardiff Garcia mysteriously writes: “But the downsides to continued QE aren’t trivial either.”
Which makes me ask: what are the downsides to continued QE?
The Federal Reserve buys long-term Treasury debt. The private sector has no less amount of safe U.S. government liabilities to serve as collateral–in fact, the cash or that short-term Treasuries now in private hands are better collateral for cash than the long-term Treasuries.
The Federal Reserve now bears some short-term risk, but not if it holds the securities to maturity–which it will. The Federal Reserve has thus promised that it will not let the money stock fall below its long-term Treasury holdings until they mature, which adds to certainty and removes deflation risk.
The private sector’s limited risk-bearing capacity thus has a reduced quantity of duration risk to bear, and that risk-bearing capacity can be turned to bearing the risks of investment and enterprise. …
I fear bubbles in real estate, in equities, and in commodities. But is Cardiff telling me that I should fear bubbles in… bonds, which have a terminal maturity date and value that pins down their value not in some infinite transversality-condition long run but in 2023?
I thereby challenge Cardiff Garcia: Explain to me just what is meant by the claim that: “The downsides to continued QE aren’t trivial.”
And if, Cardiff, you meet not this challenge, I name you caitiff, and offer you slight regard!”
Christopher Chabris, Blog, Why Malcolm Gladwell Matters (And Why That’s Unfortunate), here. Googling “Tao Proved” returns 2,430 results. Mr Chabris points out “Gladwell proved” returns a count that is double that. “Dennis Rodman Proved” gets 111K results, so those guys have some catchup work to be as productive as The Worm, I guess.
I say good for you to everyone who doesn’t take Gladwell seriously. But the reason I take him seriously is because I take him and his publisher at their word. On their face, many of the assertions and conclusions in Gladwell’s books are clearly meant to describe lawful regularities about the way human mental life and the human social world work. And this has always been the case with his writing.
Peter Woit, Not Even Wrong, Nobel for Englert and Higgs, here.
The Higgs discovery last year was one of the great milestones of fundamental physics research and it would have been very odd for the
Nobel committeeSwedish Academy of Sciences to not recognize it with a prize this year. I do think though that the way they chose to do this is not ideal, for a couple reasons.
Sam Wang, Princeton Election Consortium, A draft of a paper on the Meta-analysis, here.
Dear readers, I’ve been invited to write an academic article on the Meta-analysis. I’m horribly late with it…but I do have a draft. I’d be interested in your thoughts and reactions. I’m sure I have not done justice to some important topics. The article text is here (PDF) and the figures are here (6.7 MB PDF). If you link to this, use this post. The paper is a working draft and subject to change!
Rothschild and Sethi, SSRN, Trading Strategies and Market Microstructure: Evidence from a Prediction Market, here. I watched this just prior (maybe a month) to the election there was 50K USD available to arb every 2-3 days. It was remarkable. It was not clear to me that it was one guy moving the Intrade market.
Abstract:We examine transaction-level data from Intrade’s presidential winner market for the two weeks immediately preceding the November 2012 election. The data allow us to compute key statistics, including volume, transactions, aggression, holding duration, directional exposure, margin, and profit for each of the over 3,200 unique trader accounts. We identify a diverse set of trading strategies that constitute a rich market ecology. These range from arbitrage-based strategies with low and fleeting directional exposure to strategies involving large accumulated positions in one of the two major party candidates. Most traders who make directional bets do so consistently in a single direction, unlike the information traders in standard models. We present evidence suggestive of market manipulation by a single large trader, and consider the possible motives for such behavior. Broader implications for the interpretation of prices in financial markets and the theory of market microstructure are drawn.
The Epicurean Dealmaker, Punished by Fate, here.
Marxist rationalist C.J.F. Dillow recently published a short post illustrating a central contention of his: that ordinary people systematically misallocate praise and blame to others based on their misunderstanding of the importance of chance in human outcomes. In particular, he cites an interesting experiment:
[The researchers] split subjects into a principal and agent. The agent chose between a safe option and a lottery, and the principal then split a sum of money between himself and the agent after seeing the outcome of the lottery. They found that principals’ payments depended upon the outcome of the lottery, even though this was obviously out of the agents’ control. For example, agents who chose the safe option were paid less if the lottery won than if it didn’t.The researchers choose to explain this finding as the allocation by the principals of “unjustified blame” to the agents. Mr. Dillow finds this outcome
consistent with research… which has also found that people just can’t distinguish between luck and skill even in the elementary conditions.