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Felix Salmon, Reuters, How the world benefits from Chinese piracy, here.
Kal Raustiala and Christopher Sprigman have a fantastic article in the latest issue of Foreign Affairs about IP laws and piracy in China. The title, which I love, is “Fake It Till You Make It,” and the gist is clear:
Given that Chinese copying has benefits as well as costs, and considering China’s historical resistance to Western pressure, the fact is that trying to push China to change its policies and behavior on intellectual property law is not worth the political and diplomatic capital the United States is spending on it.
Tom Standage, Climateer Investing, Share it Like Cicero: the 2000 Year History of Social Networking, here.
One of the stories I tell in “Writing on the Wall” is about the way the Roman book-trade worked. There were no printing presses, so copying of books, which took the form of multiple papyrus rolls, was done entirely by hand, by scribes, most of whom were slaves. There were no formal publishers either, so Roman authors had to rely on word-of-mouth recommendations and social distribution of their works via their networks of friends and acquaintances.
David Mayes, may0615, Google’s “Loon Balloon” WIFI Feels Like a KIWI #8 Wire Project, here. Got Anthony Hopkins in the World’s Fastest Indian trailer. #8 Wire DynaPie Blimp please. Solar powered, stratospheric balloon top of book delivery and matching engine queuing system – make it watch Newark like an Argus drone and maybe you get Corey Booker on board? I know just pick a random guy in New Jersey and track him down on the internet and ARGUS film him for a week for your new You Tube show This is Your Life 2. Then tell people you are going to make this a weekly show. Use Born in the USA for the intro music to This is Your Life 2 – Reality TV raised to a higher power.
With regard to the metaphor of Kiwi #8 Wire projects, it is part of the history of New Zealand. #8 wire is the stuff that is used in New Zealand to fence in the sheep, thousands of miles of it. The term is used loosely to describe “loony” far fetched innovation projects, probably including eccentric tinkers. For many years until PM David Lange opened the NZ economy in the 1980′s, it was heavily protectionist. The tariff burden on imports was heavy, and the economy was stuck in a South Pacific doldrum. As a consequence, Kiwi’s increasingly became known for extraordinary ingenuity with whatever found materials they could lay their hands on. A #8 wire project became the metaphor for creative thinking in NZ. Examples of this abound. There is even a prominent venture capital firm in Wellington named “#8 Ventures.”
Submarine Cable Map 2013, TeleGeography, here.
John D’Antona, Traders Magazine.com, SEC Names Berman as Associate Director of the Office of Analytics and Research, here.
In his new role, Berman will oversee the newly established office to conduct research and analysis that will help inform the Commission’s policies on markets and market structure.
James Plafke, Extreme Tech, Fujitsu develops new data transfer protocol that is 30 times faster than TCP, here.
Fujitsu claims that the currently unnamed transfer protocol offers speeds of up to 30 times those provided by standard TCP, citing the protocol to reduce virtual desktop operating system latency to under 1/6 of the latency previously experienced. The protocol is software-based, and works not only by employing a more efficient method of resending data lost in the transfer, but employing a more efficient method of checking to see if data was lost in the first place. The new protocol will also perform efficient real-time measurements of bandwidth, allocating and restricting the transfer of data when necessary. Along with that, Fujitsu claims the new protocol speeds up TCP methods from a base level, inherently speeding up TCP in general.
Got some time before I have to go tend the fantasy bball team mired in the middle of the dogpile. This a generalized two exchange trade crossing model. The generalization to more than two exchanges is straightforward.
Here, in the DynaPie Latency Model Figure (below), we have represented two colo installations. The first colo contains Exchange EX1, Gateway GW1, and Client Server CL1. The second colo similarly contains an exchange, gateway, and Client server (EX2, GW2, CL2). The Client Servers run the relevant exchange protocols to perform order execution via respective broker dealer gateways and solicit current market data from each exchange locally. To simplify the analysis we assume all latency is accounted for in the links, and for example, the portion of the gateway latency not accounted for in the link latency is negligible. The market data and client to gateway Link latency, represented by the variable L, is equal to a constant C. We assume the latency for any link within the colo is a constant. If you worry about this, you can assume C is the longest latency measured on average over a sufficiently large sampling period of all links within a single colo installation. The client, via the colo gateways, has two order entry options. CL1 can send a new order (wlg any other message) to EX1 via GW1 or send a new order to EX2 via GW1. CL2 has symmetric corresponding order options via GW2. The latency to submit a new order within the colo is C as previously discussed. The latency cost to submit a new order from GW1 to EX2 is ax+b, where a and b are constants and x is proportional to the minimal transmission line latency connecting GW1 and EX2. Similarly the latency between GW2 and EX1 is ax+b (we assume the same transmission lines, nics, and switch connecting the gateways and exchanges). Finally, the latency between the two client servers is represented as dy+e where d and e are constants and y is proportional to the minimal transmission line latency connecting CL1 and CL2.
Hot Interconnects, Keynotes, here. They all look interesting. Look at the Software Defined Networks abstract for example:
Networks are notoriously hard to debug. Today, we only have a rudimentary set of tools available, such as ping, traceroute, tcpdump, and netflow. These tools try to reconstruct the distributed state of the network in an ad-hoc fashion, while the state is being constantly changed by a variety of complex distributed protocols. Software-Defined Networks (SDNs) make it possible – for the first time – to verify, validate, and even prove that the network is behaving correctly. SDN provides the opportunity to rethink how we write network control programs, from the development of control programs all the way to their deployment in production networks.
Zeldman, Web Design Manifesto, here. Pink I due for a face lift?
This is my personal site. There are many like it, but this one is mine. Designers with personal sites should experiment with new layout models when they can. Before I got busy with one thing and another, I used to redesign this site practically every other week. Sometimes the designs experimented with pitifully low contrast. Other times the type was absurdly small. I experimented with the technology that’s used to create web layouts, and with various notions of web “page” design and content presentation. I’m still doing that, I just don’t get to do it as often.
Many people who’ve visited this site since the redesign have commented on the big type. It’s hard to miss. After all, words are practically the only feature I haven’t removed. Some of the people say they love it. Others are undecided. Many are still processing. A few say they hate it and suggest I’ve lost my mind—although nobody until you has suggested I simply didn’t have access to a computer and therefore didn’t know what I was designing. This design may be good, bad, or indifferent but it is not accidental.
THOMPSON: What does the Facebook IPO mean for Silicon Valley?
BLANK: I think it’s the beginning of the end of the valley as we know it. Silicon Valley historically would invest in science, and technology, and, you know, actual silicon. If you were a good VC you could make $100 million. Now there’s a new pattern created by two big ideas. First, for the first time ever, you have computer devices, mobile and tablet especially, in the hands of billions of people. Second is that we are moving all the social needs that we used to do face-to-face, and we’re doing them on a computer.
And this trend has just begun. If you think Facebook is the end, ask MySpace. Art, entertainment, everything you can imagine in life is moving to computers. Companies like Facebook for the first time can get total markets approaching the entire population.
HPC Wire, Myricom, Emulex Take Aim at High Performance Networking, here. This idea of a supercomputer network fabric for the rest of us is popping up regularly, see the Dally/Stanford EE times interview as well.
Myricom and Emulex are teaming up to bring a series of network offerings to market targeted for high performance applications. The partnership will kick off with Emulex reselling Myricom 10GbE products into selected application domains, but the end game is to go after the high-flying InfiniBand market with products based on Emulex’s Ethernet ASICs and Myricom’s high performance software.
Essentially the collaboration is about leveraging Myricom’s low latency/high bandwidth interconnect smarts with Emulex’s more developed roadmap for Ethernet and its considerably deeper market reach. For Emulex, this is somewhat of a mid-course correction on its plans to bring converged networking to the masses. The company, which started out in the Fibre Channel space, jumped on the converged Ethernet bandwagon at a time when everyone believed datacenter traffic was destined to travel down a single pipe.
Quant Turk, About, here. Something happening here.
There are bunch of academics and practitioners working on quantitative finance related issues in Turkey. But what we have observed is that we do not have a single meeting point to share ideas, documents or simply ask questions…
This site is an effort to increase interaction and information sharing for anyone involved in quantitative finance from a math prof. to a junior trader or a CRO to a finance undergrad. All who want to post an information or comment a post are welcome.
io9, Wikipedia’s founder will help make academic research available to all, Wow, Gowers is doing good. But it looks like Jimmy Wales is going to get to do the historic Berlin “Tear down this paywall” speech. Hope the ACM and IEEE archives open up soon.
Microprocessor Report, website, here. Haven’t seen this in a long while. Used to be fabulous for general purpose HPC stuff. Not sure how much of a player it is these days. Seems to be mostly locked behind paywall.
Tom’s Hardware, Leaked Slide Shows Intel Haswell Set for March-June 2013, here.
Intel is set to launch its new Ivy Bridge processor in April 2012 and will make the move to 22 nm on LGA 1155. It will feature faster integrated graphics controller, lower TDP, higher clock speeds and overclocking ceiling with the 22 nm process. Right around the corner, Intel is set to release its “tock” strategy with the Ivy Bridge successor, codename Haswell.
Haswell is expected to have Advanced Vector Extensions 2 (AVX2), DX11.1, OpenGL 3.2, Thunderbolt, Transactional Synchronization Extensions (TSX) and Windows 8 support.
It’s the AVX2 and possibly the Transactional Synchronization Extensions you are willing to think hard about from the FinQuant app side. For example, I think w. AVX2 there is mumbling about giving you 8-way SIMD scatter-gather. Think of that as single clock binary protocol parsing, after everything is aligned and suitable genuflecting has taken place with the compiler switches. Most of the other headline stuff seems to be there to do a bunch of SoC stuff to fight for mobile systems market share.
HPC Wire, Myricom Claims Lowest UDP, TCP Latency for High Frequency Trading, here.
Myricom DBL 2.0 software has benchmarked application-to-application UDP latency of under 3.5 microseconds and transparent sockets TCP latency of 4.0 microseconds. For HFT applications, DBL enables unmatched networking performance for UDP multicast and TCP order execution, all over industry-standard 10-Gigabit Ethernet.
So, we’re getting expectations set at 3 to 4 microseconds for kernel bypass. Which in turn will presumably be overtaken by RDMA NIC to L3, or will it still cost me multiple microseconds to traverse the TCP stack for ECC, retransmission, and packet ordering?
Hieroglyph, web site, here. Neal Stephenson pumping big Big Science.
My life span encompasses the era when the United States of America was capable of launching human beings into space. Some of my earliest memories are of sitting on a braided rug before a hulking black-and-white television, watching the early Gemini missions. At the age of 51—not even old!—I watched on a flat-panel screen as the last Space Shuttle lifted off the pad. I have followed the dwindling of the space program with sadness, even bitterness. Where’s my orbiting, donut-shaped space station? Where’s my fleet of colossal Nova rockets? Where’s my ticket to Mars?
Business Insider, REVEALED: The Asteroid Mining Plan Backed By Google And Goldman Billionaires, here.
EE Times, Broadcom aims to spread 100-Gbit Ethernet with single-chip solution, here.
Broadcom Corp. Tuesday (April 24) announced its fourth-generation Ethernet network processor, which it claims is the industry’s first chip to use massive parallelism by virtue of its 64 packet-processing cores running at one gigahertz. Providing full-duplex 100Gbit per second performance, it can also be configured to provide a dozen 10-Gbit channels.
The VivadoTM Design Suite is a new IP and system-centric design environment that accelerates design productivity for the next decade of All-Programmable devices.
All-Programmable devices go beyond programmable logic and I/O, integrating various combinations of 3D stacked silicon interconnect technology, software programmable ARM® processing systems, programmable Analog Mixed Signal (AMS), and a significant amount of intellectual-property (IP) cores. These next generation devices enable designers to go beyond programmable logic to programmable systems integration, to incorporate more system functions into fewer parts, increase system performance, reduce system power, and lower BOM cost.
NYT, Carr, Navigating a Tightrope With Amazon, here. Buzz Bissinger got his book into a Starbucks promotion through Apple that subsidized his book sales. The Amazon pricer covered by offering the book at 0.00 dollars. My guess is Amazon will fix the pricing code to buy all the subsidized Apple copies and resell them as used copies at a non zero price to keep Buzz happy. Crowdsource as a Kickstarter project to pay 0.01 USD for each subsidized Bissinger book up to the limit you think is number of copies authorized by Starbucks, it could work.
MITx, web site, here. Anant Agarwal Circuits course is pretty good from the few lectures I watched. The guy has some I/O bandwidth.
MITx will offer a portfolio of MIT courses for free to a virtual community of learners around the world. It will also enhance the educational experience of its on-campus students, offering them online tools that supplement and enrich their classroom and laboratory experiences.
The first MITx course, 6.002x (Circuits and Electronics), will be launched in an experimental prototype form. Watch this space for further upcoming courses, which will become available in Fall 2012.
Algorithms, Sedgewick and Wayne, 4th Edition, here. They’re covering the online free course trend starting in Aug 2012, here . They are going to sell some books, I think. First, they have the Princeton Logo for the course, that’s a big deal I suspect. Second, isn’t this a case where the dog and the tail are mixed up? We’re leading with the Book (the tail) and then mention there is this course thing (The Dog) you are probably not interested in. So where do we mention that course, the one that Bezos took before he went to Amazon? Somewhere toward the end of the announcement where people won’t see it. And lets make it two courses so they have to sign up for each one, in case they don’t like the first one. The Headline announcement should be:
Psst, Kid wanna do Algorithms with Sedgewick? Wouldja look at this? Here is a free internet course starting in August, direct from Pee – rince – ton Univer- si – tay. U in? …good! Oh, and there’s a book that will help you solve the homework problems at Amazon, buy it if you need it. Gotta go kid, see ya.
Street 101. Irving Wladawsky-Berger, Blog, here. Head of IBM Research back in the day. Probably worth tracking to see where it goes. Salmon, The problem with Marc Andreessen, here. Felix says where’s the beef? Andreessen has a blog pmarca, here. Technology Review, Moore’s Law Lives Another Day, here. Confirms what was bugging me, the 3D lithography techniques have been around since the late 80s in Japan. Used to see it in DRAM manufacturing presentations. 22 years to volume production in 22nm process for x86. Wired, April 19, 1965: How Do You Like It? Moore, Moore, Moore, here. Puff piece, but it has a link to Moore’s 1965 paper in Electronics magazine.
Next-generation 20 nm processes can support optimized versions for low power and high performance, according to an IBM expert. GlobalFoundries will decide in August whether or not it will offer such variations.Those were just two data points from wide ranging discussions at the GSA Silicon Summit here. Separately, executives said a variety of 3-D ICs will hit the market in 2014 despite numerous challenges, and CMOS scaling is slowing down but still viable through a 7 nm node.“Recently TSMC said at 20 nm there are no significant differences [in process optimizations], but I don’t believe that,” said Subramanian Iyer, an IBM fellow and chief technologist in its microelectronics division. “I believe at same node you can have two [different variations],” he said in a keynote here. Indeed, GlobalFoundries is debating whether it wants to offer high performance and low power variants of a 20 nm process it is putting in place today.
Fabless FPGA vendor Achronix Semiconductor Corp. (Santa Clara, Calif.) has announced details of its Speedster22i HD and HP product families, claimed to be the first FPGAs to be built on a 22-nm manufacturing process technology.The devices are the result of a foundry agreement with Intel Corp. announced in November 2010 and the first devices are due to sample in the third quarter of 2012.Both the HD (high density) and HP (high performance) families come loaded with a variety of high-speed data communications interfaces hardwired. These include 10/40/100G Ethernet MACs, 100Gbit Interlaken channels, PCI Express and DDR3 memory channels that run at up to 2133 Mbps. In the case of the HD1000 device these are two, two, two and six respectively. This optimizes the Speedster22i FPGAs for work in networking and telecommunications equipment although the company stresses that the devices can find applications in servers, high-performance computing, military, industrial and scientific applications. The large number of high speed memory channels provides the industry’s highest bandwidth FPGAs, Achronix claimed.Achronix’ existing product range is based on 65-nm process technology and the move to Intel’s 22-nm FinFET process allows Speedster22i family to consume half the power at half the cost of high-end, 28-nm FPGAs.
Wired, How to Spot the Future, here.
This may sound like a paradox. Surely technology always promises something radically new, wholly unexpected, and unlike anything anybody has seen before. But in fact even when a product or service breaks new ground, it’s usually following a familiar trajectory. After all, the factors governing thermodynamics, economics, and human interaction don’t change that much. And they provide an intellectual platform that has allowed technology to succeed on a massive scale, to organize, to accelerate, to connect. So how do we spot the future—and how might you? The seven rules that follow are not a bad place to start. They are the principles that underlie many of our contemporary innovations. Odds are that any story in our pages, any idea we deem potentially transformative, any trend we think has legs, draws on one or more of these core principles. They have played a major part in creating the world we see today. And they’ll be the forces behind the world we’ll be living in tomorrow.
Noahpinion, Thursday Roundup, here, I need to know more about how money market funds and commercial paper broke in the credit crisis – he points to Cochrane on money markets which is a start. The idea is to sort out where bank runs can happen as confidence evaporates. What breaks first next time? Noah Smith could be the EcoFin summary guy after DeLong. HPC Wire, Some Thoughts on Intel’s Acquisition of Cray’s Interconnect Technology, here. They lead with:
The reasons for this deal, in my opinion, are as follows: The general trend to commodity components continues. For small companies like Cray (with about 800 employees), it is simply too expensive to innovate and develop sophisticated hardware such as an interconnect for exascale computing. And Intel is certainly able to take this on, especially now with all the expertise gained from the previous QLogic acquisition and now from the 74 interconnect experts moving from Cray to Intel.
Craig’s List, I will legally change my name to yours for a WWDC ticket, here. I like how Gruber posts stuff that induces Karl Denninger (here) to call a market top on AAPL, Gruber records it in Claim Chowder on Daring Fireball, and then Gruber spikes the unfortunate Karl Denninger 6 months later. It’s like who killed Kenny in South Park. I am worried however that John Gruber is just an alias for Karl Denninger, which would make the world a smaller, less predictable, and meaner place, so I won’t think about that.
Turing’s Invisible Hand, I grade grad AI, here. Nice slides from the course.
This semester I have been co-teaching (with the awesome Martial Hebert) CMU’sgraduate artificial intelligence (grad AI) course. It’s been a lot of fun teaching AI to a class where a significant fraction of the students build robots for a living (possibly some of the students are robots, especially the ones who got a perfect score on the midterm exam). Although the last class is on May 2, I already gave my last lecture, so this seems like a good time to share some thoughts.
My general impression is that many AI courses try to cover all of AI, broadly defined. Granted, you get Renaissance students who can write “hello world” in Prolog while reciting the advantages and disadvantages of iterative deepening depth-first search. On the down side, breadth comes at the expense of depth, and the students inevitably get the very wrong impression that AI is a shallow field. Another issue is that AI is so broad that some if its subdisciplines are only loosely related, and in particular someone specializing in, say, algorithmic economics, may not be passionate about teaching, say, logic (to give a completely hypothetical example).
Business Insider, BLANKFEIN: The Only Reason Goldman Got Into Trouble Is Because Our Competitors Sucked At Risk Management, here.
DealBreaker, Marvel At The Derivative On Its Derivatives That Credit Suisse Wrote To Itself, here. This looks like the mezz tranche CS awarded for end of year compensation a couple years back. I stopped reading Deal Breaker for a while, but Levine has been very solid recently.
Business Week, Stock Trading Is About to Get 5.2 Milliseconds Faster, here. 59.6 milliseconds NYC to Lon roundtrip latency.
HPC Wire, Intel Makes a Deal for Cray’s Interconnect Technology, here. So Cray wants out of the interconnect hardware business.
Supercomputer maker Cray is methodically and inevitably shifting its technology focus from hardware to software. Another step in that direction played itself out this week in the company’s sale of its highly treasured supercomputing interconnect technology. On Tuesday evening, Cray and Intel announced that they signed a “definitive agreement” that would transfer the interconnect program and expertise to the x86 chipmaker.
Cluster Monkey, Cluster Interconnects, here.
This article will focus on interconnects that aren’t tied to vendor specific node hardware, but can work in a variety of cluster nodes. While determining which interconnect to use is beyond the scope of this article, I can present what is available and make some basic comparisons. I’ll present information that I have obtained from the vendors websites, from information people have posted to the beowulf mailing list, the vendors, and various other places. I won’t make any judgments or conclusions about the various options because, simply, I can’t. The choice of an interconnect depends on your situation and there is no universal solution. I also intend to stay “vendor neutral” but will make observations where appropriate. Finally, I have created a table that presents various performance aspects of the interconnects. There is also a table with list prices for 8 nodes, 24 nodes, and 128 nodes to give you an idea of costs.
Wired, Vint Cerf: We Knew What We Were Unleashing on the World, here.
Vint Cerf invented the protocol that rules them all: TCP/IP. Most people have never heard of it. But it describes the fundamental architecture of the internet, and it made possible Wi-Fi, Ethernet, LANs, the World Wide Web, e-mail, FTP, 3G/4G — as well as all of the inventions built upon those inventions.
Cerf did that in 1973. For most of you that’s probably 20 years before you even knew what the internet was. That’s why he’s known as the father of the internet and earned himself a Presidential Medal of Freedom. Cerf didn’t stop there — he went on to co-found the Internet Society (ISOC) and served as president of ICANN, the organization which operates the domain naming system.
PC Mag, Intel’s Ivy Bridge: 10 Things You Need to Know, here.
More overclockable. Supporting version 1.3 of Intel’s Extreme Memory Profile, real-time core ratio changes, and improved overrides for processing, graphics, and memory functions, Ivy Bridge offers options for tweaking your system’s performance over and above what you can get from either Sandy Bridge or Sandy Bridge Extreme CPUs. In our testing, we had no trouble pushing the Core i7-3770K from 3.5GHz to 4.6GHz using a stock fan and heat sink; with time, determination, and more aggressive cooling, you should have no trouble doing even better. You will, however, need a motherboard with the Z75 Express or Z77 Express chipset.
Slashdot, C/C++ Back On Top of the Programming Heap? here. Hammer Principle, Browse the Programming Language Rankings, here. How about the principle “This is a mainstream language” 14 out of 15 respondents picked Haskell over Standard ML.
Anna Gelpern puts it well: “for the small but committed contingent of pari passu pointy heads, this is WorldCupOlympicMarchMadnessSuperBowl.” I’m one of the contingent, and I’ve been actively enjoying myself reading various appeals and amici briefs in the case of Elliott Associates vs Argentina. (Technically, it’s not Elliott Associates but rather NML, an Elliott sub-fund, but make no mistake: this is very much a fight between Argentina and the most famous vulture fund in the world.)
Elliott, which is run by the billionaire Republican activist Paul Singer, has suffered a rare and public loss with respect to its Argentina strategy. It bought up Argentine debt around the time the country defaulted, and then refused to enter into the country’s bond exchange, taking its chances in U.S. court instead. That, in hindsight, was a mistake: Argentina’s new bonds, turbo-charged with GDP warrants, performed extremely well. While its defaulted debt has gone absolutely nowhere.
When Elliott started litigating its defaulted debt a decade ago, it quite explicitly told the judge in the U.S. Southern District, Thomas Griesa, that it wouldn’t wheel out the most notorious and legally dubious weapon in its arsenal: the pari passu argument it used to devastating effect against Peru in 2000. In 2003, indeed, Argentina’s lawyers asked the court for a declaration that the argument was legally bonkers; the only reason that Griesa didn’t provide that declaration was that Elliott Associates — in line with all the other holdout creditors — said that it had no intention of making the argument, “at any time in the near or distant future”.
In fact, Elliott was just playing the waiting game — waiting, that is, for 91% of the other creditors to go away, persuaded by Argentina to accept its exchange offer. And then, after a decent amount of time — five years — it suddenly decided that it was going to attempt to use its rather odd pari passu argument after all.
Waiting that long held dangers, since it smells of what lawyers call “laches” — unreasonable delay in making a claim. But it was also quite smart, since at that point Elliott had been fighting Argentina in front of Judge Griesa for a decade, and Griesa was officially Fed Up with the whole thing and just wanted to make it go away.
Griesa’s orders (here here here) are notable for their lack of legal reasoning: Griesa is throwing his hands in the air, here, and basically punting the whole issue up to the appeals court. Each one is very short, certainly in comparison to the long, compelling, and clearly-argued amici briefs, let alone Argentina’s masterful, 84-page response. After reading that, and the briefs from the Justice Department and The Clearing House , it’s basically impossible to see how Griesa’s order can possibly be upheld on appeal.
Naked Capitalism, The Hidden Bank Time Bomb: Interest Rate Risk, here.
At the Atlantic Economy Summit in Washington last month, Sheila Bair fielded a question about the just-released results of the latest bank stress tests. The former FDIC chief took pains to point out that they were an improvement over earlier iterations by virtue of keying off a truly dire economic scenario, but then ticked off a number of ways in which they fell short. One was in that they focused solely on credit risk, when historically, adverse interest rate moves have proven very effective in decimating the banking sector. Witness phase one of the savings and loan crisis, in which hasty deregulation and gimmickry in the early 1980s set up the crisis later in the decade, or the derivatives wipeout of 1994, in which an unexpected 25 basis point Fed funds increase created bigger losses than the 1987 crash, or the losses on US bond portfolios in 1997 and 1998, which among other things nearly wiped out Lehman.
The perils of interest rate risk have largely receded from memory since the US has been in a long-term disinflationary trend since 1983. But with rates at zero, we have nowhere to go but up from here.
Chris Whalen, in his latest newsletter, argues that this risk is even nastier than it might appear. One way of mitigating interest rate risk is by holding shorter-dated instruments. The reason is that the more back-weighted your payments are, the more exposure you have to changes in interest rates.
Investors measure this sensitivity via duration. There are somewhat different ways to measure it. One is the weighted average of payments. That gives you a result than under most circumstances is very close to the price sensitivity of a bond to interest rate changes. At “normal” interest rates, a current coupon bond of just under 10 years will have a 10% sensitivity to interest rate changes.
But, as Whalen points out, this all goes haywire when interest rates are super low. So much of the value is in the repayment of principal and so little in the intervening interest payments that it pushes duration out and increases interest rate risk disproportionately. That effect may be further compounded by the fact that banks are desperate for yield and with the yield curve flatish, they are likely to be extending the maturity of their assets.’And of course, anyone holding mortgages will see them extend, since refis will halt and home sales will probably be depressed, since higher interest rates mean more expensive mortgages, which all other things being equal, means lower home prices.