Shane's Feed
Jun 6, 2014
via Counterparties

High-frequency news

Yesterday, Securities and Exchange Commission chair Mary Jo White gave a speech about the current structure of US markets. Her comments directly addressed the controversy over high-frequency trading (HFT) and dark pools (trading outside of exchanges) brought up by Michael Lewis’s book “Flash Boys” and New York Attorney General Eric Schneiderman’s recent series of moves to try to ban HFT. Lewis’s one-sentence summary of his book on a post-release interview: “The US stock market… is rigged”.

White, however, disagrees. The structure “is not fundamentally broken, let alone rigged”, she said. However, she did announce a plan to reform market structure. The two most concrete new rules require high-frequency traders to register with the SEC and operators of dark pools to let the SEC know how they match buyers and sellers. Sam Mamudi and Nick Baker at Bloomberg Businessweek note that “praise for White and the SEC was almost effusive yesterday from exchanges and high-frequency firms”.

Jun 6, 2014
via Data Dive

After six years, the US economy got its jobs back

“The scariest jobs chart ever”, which Bill McBride at Calculated Risk has been updating month by month for years, is finally ready to be retired.

That’s right — with the 217,000 jobs added in May, the US economy is finally, finally back to the pre-recession employment level.

Jun 5, 2014
via Counterparties

ECB goes negative


Europe has reached the zero lower bound. After its June meeting today, the European Central Bank announced a number of policy changes (a “swarm”, according to Joseph Cotterill). Bloomberg’s Maxime Sbaihi helpfully chartified the ECB’s actions:

But will it work? ¯\_(ツ)_/¯

“The lesson today: Don’t underestimate Mario Draghi. Or the ECB, for that matter”, writes the WSJ’s Moneybeat team. The biggest move is probably the -0.1% deposit rate — meaning banks have to pay the ECB in order to park their money there overnight (here’s a more detailed explainer of negative rates). This is for two reasons, says Neil Irwin: first, if it’s expensive to keep money at the ECB, banks will hopefully do something else with it, like lend it out. Second, if it is expensive in general to keep money in Europe, the ECB hopes the price of the euro will fall in currency markets and inflation will rise — something Europe desperately needs.

Jun 4, 2014
via Data Dive

Litigation risk is increasing for European banks

As it becomes more likely that the United States will be fining French bank BNP Paribas around $10 billion for evading US sanctions (over protests from French politicians), Credit Suisse’s (CS) banks research team released an updated estimate for litigation costs for major European banks (pdf). Things are looking less rosy 15 months later. The original estimate, from February 2013, was $58 billion in 38 areas of potential litigation for 10 European banks. CS now thinks these banks will end up paying $104 billion.

This is what Credit Suisse refers to as an “increasing headwind”. In other words, it’s going to costs the banks money. From the report:

Jun 3, 2014
via Counterparties

Green(ish) energy

Want to sign up for the Counterparties email? Click here.

This week, the EPA unveiled its new rule to cut carbon emissions by 30% by 2030 (that is, 30% from 2005 levels). Most of those cuts will come from burning less coal, which is currently the source of about 38% of the United States’ electricity.

Conservatives rushed to oppose the new rule, calling it “Obama’s War on Coal”. However, the Washington Post points out, many Republicans relied on pre-prepared statements that leaned heavily on a Chamber of Commerce study, which came out last week and assumed the EPA rule would require a 42% cut in emissions. From a regulatory perspective, Tyler Cowen says the EPA plan reminds him a lot of the original version of the Clean Air Act, passed in 1963. It was so ineffective at that point, he writes, that it had to be amended in 1965, 1967, 1970, 1977, and finally again in 1990. Further, “a lot of actual progress in the fight against air pollution came through the replacement of dirty coal by natural gas”.

Jun 2, 2014
via Data Dive

Low volatility: worrying trend or new normal?

Volatility in financial markets is low, and that concerns New York Fed president William Dudley. Reuters reported he said last week, ”I am nervous that people are taking too much comfort in this low-volatility period and as a consequence of that, taking bigger risks.”

For instance, Treasuries volatility is really, really low:

As is equities:

And foreign exchange:

The Fed is worried that stable prices are encouraging  investors to increase their borrowing and load up on risk, which could end poorly if the economy goes south. But what if this is simply the new normal? Izabella Kaminska has an interesting take:

May 30, 2014
via Counterparties

Right on the euro

The EU has finally wrapped up its parliamentary election results. Discontent in Europe runs high, mostly because of the persistently terrible economy. To the horror of many, populist euroskeptic parties continent-wide — nationalist, anti-immigration, anti-EU, and often openly racist — scooped up roughly 140 of the 751 seats, up from about 60 in 2009. (Here’s a decent rundown of six of the parties).

Voters are tired of austerity, high unemployment, and stagnation. “After five gruelling years, many of Europe’s citizens must wish they could dispatch the entire political class to hellfire and torment”, writes the Economist. Since that isn’t an option, most didn’t bother to turn out for the elections. Many of those who did came to back extremist candidates. Anatole Kaletsky calls it “a perfectly predictable — and justifiable — upsurge of populist anger after the euro crisis”. He says the varied extreme parties are unlikely to work with each other, anyway. Tyler Cowen predicts Europe doesn’t have the political coordination to keep itself from imploding.

May 27, 2014
via Counterparties

Capital debate

Want to sign up for the Counterparties email? Click here.

Just in time for the Friday afternoon news dump (on a holiday weekend!), the FT’s Chris Giles dropped a bombshell: Thomas Piketty’s “Capital in the Twenty-First Century,” he alleged, is full of data errors. After correcting the mistakes, he says (in a separate post), “two of Capital in the 21st Century’s central findings – that wealth inequality has begun to rise over the past 30 years and that the US obviously has a more unequal distribution of wealth than Europe – no longer seem to hold”.

Giles’ allegations boil down to three points, detailed in a long blog post: first, Piketty transcribed some numbers into Excel wrong. Second, Piketty made some unexplained changes to the data. Finally, Piketty used questionable methods to arrive at his conclusions. In addition, Giles takes very specific issue with Piketty’s data on wealth inequality in Britain, claiming that “once more reliable British results are included, there is no sign that wealth inequality in Europe is rising again”.

May 19, 2014
via Counterparties

Freddie or not

Want to sign up for the Counterparties email? Click here.

The new top regulator of Fannie Mae and Freddie Mac thinks the U.S. needs more mortgages. Mel Watt, the head of the Federal Housing Finance Agency (and ex-Democratic congressman), gave a speech at Brookings this week sharply diverging from his predecessor’s goal to wind down the mortgage giants. The goal going forward is to relax regulation to make it more likely banks will lend to homeowners with less-than-perfect credit. The WSJ has a great chart comparing credit score distribution of people who qualified for loans in 2001 and 2013. Needless to say, it’s a lot harder these days.

“What could go wrong?” the Economist writes, calling Watts’ plan the “return of the toxic twins”, whose risky investments (and loose credit standards) helped inflate the housing bubble prior to 2008. But a Bloomberg View editorial argues that Watt’s proposal makes sense: “It’s unclear how much the changes will boost mortgage lending or the housing market, but there’s no need to worry that they’ll bring back the crazy lending of the boom years”. For one thing, they say, “delinquency rates on loans guaranteed since the crisis have been close to zero”.

May 15, 2014
via Counterparties

Europe’s easing growth

European growth is weak. As a whole, eurozone GDP grew just 0.2% in the first quarter, and no individual economy grew more than 1.1% (Poland and Hungary). Germany, the UK, and Spain all reported modest growth, but Portugal, Italy, and the Netherlands all saw negative growth while France was completely flat. The latest OECD report on the global economy, noted that the euro area is expected to grow by 1.2% this year, but “monetary policy needs to remain accommodative” and “ interest rate reduction is merited, given low and falling inflation”.

At yesterday’s annual SALT conference of hedge-fund investors and managers, David Tepper said the ECB is “really, really behind the curve”, and there is a risk to the global economy if the ECB doesn’t take drastic action. Jennifer McKeown wrote in a note for Capital Economics that she expects “more significant action, including small cuts in the refinancing and deposit rates and quite possibly a full blown QE programme, to come next month or soon after”.