Felix Salmon

Volatility on no news

Felix Salmon
Jun 29, 2010 14:02 UTC

What do you call a market which rises on bad news and panics — as it’s doing today — on no news at all? The 10-year Treasury is now yielding less than 3%, the Dow’s back below 10,000, the VIX is over 30, and the Nasdaq is down 2.4% in a matter of minutes; French stocks have fallen more than 3% today, and in general the global risk-aversion trade seems to be back on.

Interestingly, gold is down a little today: maybe at these levels it’s more of a risk asset than a safe haven. But more generally I think we’re seeing what happens to markets which are much more global, complex, and interconnected than they’ve ever been in the past: correlations can appear out of nowhere, and it’s silly to even attempt to explain significant intraday market movements by recourse to anything in the news.

Our brains are hard-wired to look for causality wherever we can, so if news isn’t causing this volatility then naturally we look for other explanations instead: is there something churning hard below the surface? Did a large number of hedge funds all have very similar trades, and now they’re all trying to exit their positions at the same time? It’s impossible to know for sure, but I do wonder how and whether the phenomenon of high volatility on no news correlates with the rise of hedge funds.

If you’re invested in these kind of markets, only the two extremes make any sense, it seems to me. Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.


Y’all have to go back ans study Pareto Distributions and basic Mandelbrot fractals, then y’all only needs to sit back and relax cause there ain’t no zero-sum game and all things revert to the mean of their distribution.Now Z-S game theory bears no symmetry to prices, pricing or CAPM at all. so y’alls has wasted your time studying it to sound smart. The only one who really understood Z-S theory was its creator, Johnny Von Neumann and he was trying to figure out how to build Atomic bombs in the deserts of New Mexico outside of Los Alamos. And, by the way, there ain’t no causality, too, in pricing, prices and CAPM.

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Felix Salmon
Jun 29, 2010 04:49 UTC

Find out the interchange fee on your credit card — True Cost of Credit

ESPN.com traffic is up 70% over its traditional annual peak of online mania during the NCAA basketball tourney — NYT

Lenny Dykstra sold $1 million in newsletter subscriptions at $995 a pop — Daily Beast

The NYC finance employment boost is the largest since May-August 2008. What could possibly go wrong? — WSJ

How to get off jury duty, t-shirt edition — NYP

Joint Statement From Former Chairmen Paul S. Sarbanes and Michael G. Oxley — PR Newswire

FIFA censors the Lampard non-goal from its ENG-GER highlights reel — FIFA


Interchange fee: I’m fighting against these bloodsucking banks. I pay cash when possible for small purchases. I’ll still take my 1% rebate on larger items.

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The double-edged sword of low mortgage rates

Felix Salmon
Jun 28, 2010 20:05 UTC

Long-term interest rates are tumbling further today: 10-year Treasury yields are now a hair’s breadth away from breaking the 3% barrier. And where long-term interest rates go, mortgage rates are bound to follow. So it’s easy to see why the purple line is falling on this chart, which comes from Barry Ritholtz and which is doing the rounds today:


Meanwhile, it’s equally easy to see why the red line is rising. It’s the ratio of rents to prices, and the first-order effect of falling prices is rising rent-to-price ratios.

But Paul Kasriel of Northern Trust reads a lot into this chart: it’s cheaper to buy than to rent, and therefore now is a good time to buy. Indeed, he says, “housing is about as an attractive a purchase as it has been in the past 40 years.”

Certainly housing is more attractive now than it was, say, five years ago: both prices and mortgage rates are significantly lower than they were back then. But back then we were near the top of the biggest housing bubble this country has ever seen, and finding house prices now attractive in relation to house prices then is akin to getting excited by Yahoo stock now, on the grounds that it costs so much less than it did in 2000.

The big picture, in terms of house prices and interest rates, is clear: prices go up when rates are falling, and they go down when rates are rising. That stands to reason: people buy what they can afford. When you’re selling your house you care about the headline price, but when you’re buying it you mostly care about how much money you’re going to have to spend each month in mortgage, taxes, and maintenance. If mortgage rates go up, the amount of mortgage you can get for any given monthly payment goes down, and so house prices have to come down lest they become out of reach.

In a housing bubble, this arithmetic is temporarily sidelined, as people buy houses they can’t afford. So where will prices from here, given that mortgage rates can only go up rather than down? Essentially, there are only two choices. Either buyers remain rational and only buy what they can afford, in which case prices are bound to fall sooner or later, when interest rates rise. Or else buyers stop being rational, start buying houses they can’t afford, and we have another bubble.

As for rents, they tend to lag prices: they never rose as much as prices did during the bubble, and they haven’t fallen as much as prices have during the bust. But as homeownership rates fall and America’s stock of foreclosed houses starts being rented out, the natural pressure on rents is likely to be down rather than up. Plug negative annual rent increases into the NYT’s buy vs rent calculator, and it’s really hard to make the case that buying is better than renting over any timeframe.

More generally, I simply don’t believe any chart which seems to imply that you can buy a house and rent it out for literally double what you’re paying on your mortgage. That might conceivably be possible in a few of the areas hardest hit by the housing bust, and I’ll happily advise anybody who finds such a market to go ahead and buy right now. A lot of the time, of course, it’s very hard to tell: American neighborhoods often have very few renters, and there’s really no such thing as the market rent in such places. There can also be serious local-market disconnects: it’s not uncommon to find would-be renters saying that there’s nothing available at any price, even as would-be landlords say that they can’t find a renter at any price.

If I could ask Kasriel one question, it would be this: when was the last time that historically low mortgage rates signalled a good time to buy, in any country? In pretty much every such case, I think, prices have only gone up if rates have fallen lower still. But now we’re bumping along the zero lower bound, and the only way that mortgage rates are falling significantly from these levels is if we get another monster recession. Which certainly won’t help house prices.


It is a double edged sword. Somewhere down the line these low payments would catch up and then the homeowners would probably end up paying the difference.
Real Estate Short Sale

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Holding corporate tweets to a higher standard

Felix Salmon
Jun 28, 2010 16:48 UTC

“NO,” shouts Joe Weisenthal today at Clusterstock, “The Supreme Court Did Not Just Strike Down Sarbanes-Oxley.” Well, of course it didn’t: it’s just an obscure auditing board which was deemed unconstitutional. So why would anybody think otherwise? Maybe because of this:

BREAKING: Supreme Court strikes down Sarbanes-Oxley, the landmark anti-fraud law. Much more to come at http://wsj.comless than a minute ago via TweetDeck

The WSJ’s Twitter feed has 326,000 followers: it’s an important news source for a very large number of highly influential people who want reliable news in fast, easily-digestible form. Twitter is a fantastic way of forcing news organizations to get straight to the point, and it’s great that the WSJ has embraced it. But at the same time, and for exactly the same reason, it’s crucial that a flagship Twitter feed like @WSJ be accurate on matters of important breaking news.

There’s also an important distinction to be made, I think, between corporate accounts like @WSJ or @Reuters, on the one hand, and personal accounts like @davidmwessel, @preetatweets, or @felixsalmon. Twitter’s personal accounts are a great equalizer, and a way for individuals to communicate with each other. Corporate accounts are different: they explicitly speak for the corporation and exemplify its standards.

A lot of companies, including Reuters, have social media policies, but I haven’t seen any of them draw this distinction. Maybe they should. To err is human, and I have gotten things wrong on my Twitter feed just as I have on my blog. That’s OK: if you’re having a conversation (and blogs, too, are conversations), you don’t have the time or the ability to fact-check everything you say, and when you find out you were wrong you can simply say so. The flagship twitter feed of a big media company, by contrast, is a different animal entirely: it’s a broadcasting mechanism more than it is an attempt to engage in conversation. The @WSJ account only ever links to WSJ.com stories: as far as it’s concerned, if something isn’t on the WSJ website, it hasn’t happened. As the Twitter face of the company, even if it has a human voice, it’s natural to hold that account to a higher standard than one would the personal account of a company employee.

I don’t want to strip the humanity from corporate Twitter accounts, which can be dry and boring if their owners second-guess themselves too much. But in the case of big media organizations’ news feeds, I think it’s probably a good idea to err on the side of excess conservatism. Especially if creating a distinction between corporate and personal accounts takes some of the pressure off employees with respect to their own personal feeds.

Update: The person behind the @WSJ account, Zach Seward, has an excellent response in the comments, and points out that the account does indeed link to non-WSJ sites, and even retweets me on occasion. Do the WSJ’s follow-up tweets constitute a correction? Not in the sense that they explicitly say that the intial tweet was wrong — but they do clarify matters. (I’m torn on whether or not the WSJ should have deleted the initial tweet when they found out it was wrong: my gut feeling is that it did the right thing by leaving it up, but it’s a very tough call to make.)

Ultimately, Seward and I agree: a corporate Twitter account should have a human voice and be held to a higher standard. The WSJ fell short of that standard in this instance, but its aspirations are in the right place.


I hadn’t given this topic much thought until I read through this post. I agree with Felix that corporate accounts do represent the corporation and as such need to stay within the boundaries of truth. Zach’s response above says much about the fact that @WSJ recognized and corrected the error. We are human even if representing corporate and accepting errors should be a part of the process.
I admire both writing styles here and look forward to continued correspondence between the two!

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The G20 tees up another crisis

Felix Salmon
Jun 28, 2010 13:55 UTC

I’ve rarely seen as much unanimity regarding an important communiqué as I have around this one — an interminable 27-page effort from the G20 which only serves to underscore the fact that when they can’t agree on what to say, bureaucrats are very good at making up for it with astonishing quantities of sheer blather:

Measures will need to be implemented at the national level and will need to be tailored to individual country circumstances. To facilitate this process, we have agreed that the second stage of our country-led and consultative mutual assessment will be conducted at the country and European level and that we will each identify additional measures, as necessary, that we will take toward achieving strong, sustainable, and balanced growth.

A “consultative mutual assessment”? What could possibly go wrong?

As Chris Giles points out, agreeing on “growth-friendly fiscal consolidation” is easy, because it’s actually meaningless. And so the G20, which is meant to play a crucial international coordinating role, is now just a shop for different heads of state to arrive at a form of words seemingly designed to constrain them as little as possible.

Mohamed El-Erian writes:

The outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world…

The communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms. The result is what game theorists label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.

In English, the U.S. is going to stay on its borrow-and-spend course, while Europe sees huge fiscal cuts. That, we could do without the G20. And it guarantees that the global imbalances the G8 and G20 have been so worried about since long before the financial crisis are going to get worse rather than better. There’s no solution in sight, which almost guarantees that the world is going to see another crisis, this time surrounding U.S. interest rates and the dollar rather than credit. The only question is when.


The likes of Paul Martin (no, not the hockey player) was needed at the table. A leader with experience globally and with economic savvy seldom found in a head of state. (he wasn’t perfect but he was smart as hell)

He could reach out to the other leaders and instill trust and that was missing. He conveyed that you have to reconcile the past to understand where you are going and he had a way of showing the road map for convergence of ideas and ideals for global interest. Seriously.

I am a centrist (not a fence sitting one) so not spouting partisan views. His policies, regulations and fiscal responsibilities are the reason why Canada is, so far, still in such good economic shape, so he deserves a nod.

No one wanted to put on the black and white hat (our present Prime Minister included) and I was hoping Obama might lead the way. Sadly, he has to be a puppet of his wallstreet economists. It has returned to bobbing heads with insular protectionist views.

They all made some commitment to some deficit reduction, but I am nonetheless hunkering in for the next crunch which will culminate in the next 2 years unless there is deficit reduction now rather then later.

Growth-friendly-debt-reduction is a very cute sound bite, but fiscal sustainability requires more then eloquent speech. There will be no bailout package for the USA. Belt tightening means you can still burst out a bit at the seams, but it makes you aware you need to keep sucking in your gut until you lose the weight. (and tough noogies if you hate my analogies)

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Felix Salmon
Jun 28, 2010 04:09 UTC

I review Ace Greenberg and Suzanne McGee — NYT

Scott Brown may kill Fin Reg bill — Reuters

Imagine CNBC in play — Philly

Must-read article on Reykjavik’s new mayor — NYT

Still asking: Who Smeared Dave Weigel? — VV, see also MR


Reading some of the Weigel stuff you’ve pointed out, and here’s my $.02. Everyone has biases, and to expect different is to not understand human nature. That said, traditional journalists are rarely asked to cover a single political movement, so their biases aren’t in focus.

Bloggers, however, may well be asked to concentrate on a specific movement, but as you’ve pointed out, blogging is a conversation that involves measures of reporting, research, analysis, and opinion. To be an honest and effective blogger, Weigel had to make his biases known to his audience, so that the rest of the conversation could occur within the proper context.

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Felix Salmon
Jun 26, 2010 04:31 UTC

Three takes on David Weigel — Ross Douthat, Foster Kamer, me

Alex Williams on the life and tragic death of Tobi Wong — NYT

Carried interest tax appears to be dead (for now) — WSJ

AIG’s Joe Cassano goes up in front of the FCIC June 30. Mark your calendars! — FCIC

No surprise: Congress includes ban on boxoffice trading — Hollywood Reporter

The UK Times loses half its readers just by forcing them to register: it’s not even charging yet! — Hitwise


I view the carried interest tax provision as the canary in the coal mine (or from Wall Street’s perspective, the gold mine).

When basic fee-based for these hedge funds and partnerships is taxed as ordinary income, like everybody else’s fee-based income, then there is a good chance that the “bought and paid for” Congress will actually be looking out for its constituents’ best interests.

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The holy grail of high growth with low spending

Felix Salmon
Jun 25, 2010 20:14 UTC

In the ongoing debate over whether or not this is the right time for fiscal austerity, everybody seems to be able to agree on one thing: the holy grail is to be able to have your cake and eat it, by reducing deficits while at the same time accelerating economic growth. Germany’s finance minister, Wolfgang Schäuble, calls this “expansionary fiscal consolidation” — but is it a chimera, or does it actually exist?

Mohamed El-Erian, for one, seems to think that such a thing does indeed exist, calling on industrialized economies “to adopt both fiscal adjustment and higher medium-term growth as twin policy goals”. And how exactly are they meant to do that?

To begin to achieve both, countries must quickly implement what were once known in the emerging market lexicon as “second generation structural reforms”…

Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets.

The experience of emerging economies cautions that such reforms are difficult to design, and politically hard to implement. They often mean short-term pain for long-term gain – the reason policymakers take so long to realise they are the right path.

There’s something missing here: the short-term pain. Everything that El-Erian mentions is politically easy to implement, in that it involves increased, rather than decreased, government spending. So where does the pain come from? Do taxes need to rise? Must spending elsewhere be cut?

Olivier Blanchard and Carlo Cottarelli, at El-Erian’s alma mater, the IMF, have more specifics. Yes, they say, the US will have to raise taxes. And cut spending:

Some cuts should be no brainers: for example, shifting from universal to targeted social transfers would involve significant savings, while protecting the poor. Containing public sector wages—which have risen faster than GDP in several advanced countries in the last decade—will be necessary.

But by far the most important thing is to get a grip on healthcare costs:

Increases in pension and health care spending represented over 80 percent of the increase in primary public spending to GDP ratio observed in the G-7 countries in the last decades. The net present value of future increases in health care and pension spending is more than ten times larger than the increase in public debt due to the crisis.

Any fiscal consolidation strategy must involve reforms in both these areas… Given the magnitude of the spending increases involved, early action in these areas will be much more conducive to increased credibility than fiscal front-loading. And will not risk undermining the recovery. Indeed, some measures in this area—while politically difficult—could have positive effects on both demand and supply.

If you make consistently good fiscal decisions, the effects on a country’s debt ratios can be huge:

Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved.

Realistically, of course, those higher revenues won’t be saved — unless the government can credibly pre-commit to a medium-term fiscal timetable. And such credible commitments are extremely difficult to design — especially when they’re so contingent on cracking such tough nuts as healthcare spending.

“Obey these commandments,” say Blanchard and Cottarelli, “and chances are high that you will achieve fiscal consolidation and sustained growth.” They’re too polite to say that if you don’t obey their commandments, then the chances are low that you will get what you’re looking for. But that’s got to be the base-case scenario in most of Europe and the US.


Ah yes, the old “politically difficult.”
So all we need is an entire generation of politically-suicidal elected officials at every level of government in the dozen or so largest global economies? (Except China – semi-benevolent dictatorship has its advantages)
I don’t see any problem with that.

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The good and the bad of Basel III

Felix Salmon
Jun 25, 2010 16:26 UTC

It’s looking as though the FT was, thankfully, a little over-hasty when it led today with a big story saying that the banks have won the Basel battle over liquidity requirements. A BIS spokesman (the BIS is the organization hosting the Basel III negotiations) says that weakening liquidity requirements hasn’t even been discussed, let alone agreed to. Yes, it’s likely that the banks will win some concessions at some point, but there’s a long way to go before then.

Joel Clark is hearing similar messages:

Senior committee members have told Risk they were shocked to see reports suggesting the proposal for a net stable funding ratio (NSFR) would be shelved, as they don’t intend to make any firm plans until the next Basel Committee meeting on July 15 at the earliest…

“Leading up to the July meeting, there are a lot of efforts to see if we have an agreement among committee members on the direction forward, but we haven’t got there yet. The committee has not agreed to the elimination of any parts of the proposal, I can say that definitively,” says one US-based regulator and committee member.

Meanwhile, another potentially enormous problem is lurking in the background: the crucial yet brain-numbing issue of accounting standards. Citigroup’s Bill Rhodes tells Global Risk Regulator’s David Keefe that the distance between the U.S. and Europe is widening, and that it could end up being a “deal-breaker”:

“Without globally agreed rules on how to measure the value of bank assets and liabilities and other aspects of the banking business, any other agreements aimed at increasing the resilience of the financial system will be virtually meaningless,” Rhodes, a former Citigroup vice-chairman, told GRR.

Amid signs that the G20’s target of achieving a convergence of accounting rules by June 2011 has already gone by the board, Rhodes says long-awaited proposals on financial instrument accounting from the Financial Accounting Standards Board (FASB), America’s accounting rule-maker, have widened the international split.

Any new regulatory regime is going to have to have banks around the world all following the same rules when it comes to basic things like measuring the value of their assets. Right now, that’s not the case — and while everybody agrees that agreement is necessary, no one seems willing to make the necessary compromises.

Is it too much to hope that Barack Obama will use his regulatory-reform victory to bash some heads on this issue at the G20? Probably yes: the details of accounting standards when it comes to measuring bank balance sheets are really not the kind of things that heads of state tend to talk about at summit meetings. But the longer the current disparity is perpetuated, the less likely it is that there will ever be any kind of an international consensus. Which could scuttle Basel III before it’s even implemented. Let’s hope that someone, somewhere, has the power to force agreement on this issue.


The bad part, with nothing substantive getting done at all, can be seen coming a mile off but is the good part about Basel III that it hasn’t gone quite as badly as it could, yet?

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