For some years now this blog has argued the inclination to hold the pan European unity project together would be stronger than most believed. Despite ad infinitum and ad nauseum calls for increased nationalization, the Eurozone refuses to buckle just yet. If it will one day die, and it certainly could, it’ll die hard.
Now that it’s Q1 2013, this ought to be stunning to many pundits. Just as global equity markets’ resilience and lack of European meltdown has astounded many investors, too.
Graphic from the Wall Street Journal.
Markets adapt, and long-term profits approach zero for high-speed trading. The winners are market participants, who benefit from higher liquidity and smaller bid/ask spreads. The part most folks miss about the flash crash is the market self-corrected as fast as it sank.
Regulator, Go Slow on Reining in High-Speed Trading: Algorithm-driven trading appears to be self-correcting. That’s good—the hyper-fast world needs it.
Much has been made recently on the movement of swaps to futures markets as a result of Dodd-Frank.
The Dodd-Frank regulatory overhaul sought to reduce risk in the swaps market in part by having as many as possible trade on an exchange where prices and volumes are posted, as well as having trades settled by central clearinghouses that guarantee payments. The CFTC began writing new rules after Dodd-Frank passed in 2010. The rule that took effect in October requires that any entity trading more than $8 billion of swaps a year—whether a financial company like a bank or a hedge fund, or a “commercial user” like an airline or a shipping company—be considered a swaps dealer and be subject to government audits and higher capital levels.
That prospect didn’t sit well with many market participants, including those who were buying and selling swaps on an electronic trading platform run by the IntercontinentalExchange (ICE). Prompted by its customers, ICE took all the energy swaps that had been trading on its electronic marketplace—more than 900 contracts—and used them to create futures contracts that could trade on its futures exchange. So now, instead of creating a customized swap with another trader, an airline that wanted to lock in the price of 1 million gallons of jet fuel at a certain date would buy jet fuel futures contracts created and managed by ICE.
From Bloomberg BusinessWeek’s: This Is What Unregulated Swaps Look Like
Unintended consequence alert! Knowing exactly how swaps would adapt around this kind of thing would be next to impossible; but knowing that they would in fact adapt was possible.
In an increasingly technocratic, “if I pull this lever the economy will do X” type of world, it pays more than ever to read the free market wisdom of Thomas Sowell. Now considered an economic classic, his Knowledge and Decisions is a must read. Known for his clarity of thought and cogency of words (Sowell is an accomplished writer), Knowledge is uncharacteristic of Sowell’s later works—often turgid, plodding, redundant, and overly long. This is more academic exuberance than pithy communication. But the gold is there, and a must read for those pondering how decisions will be made as the world of Dodd-Frank arrives.
“If politicians stopped meddling with things they don’t understand, there would be a more drastic reduction in the size of government than anyone in either party advocates.” – Thomas Sowell
As a follow up to my previous post on housing supply, read Christopher Matthews latest Time Magazine Article: What Ever Happened to the Big, Bad “Shadow Inventory” of Homes?
Dash your expectations for a go-go housing expansion like last decade, but expect a steady recovery in US home prices and a modest GDP tailwind from residential construction. Here’s why:
Simply, the economy has worked through excess inventory created by the last downturn, and housing supply hasn’t seen these low levels basically since they started recording this sort of thing. This creates significant pressure to expand supply, and that’s been seen—in spades—in recent homebuilder sentiment indexes.
Check out what Forbes contributor and Fisher Investments commentator Lara Hoffmans says are the four things for investors to keep in mind over the next year:
For those interested in forecasting (particularly for political outcomes) as a field of study, Philip Tetlock is a name you should know. Here’s an insightful interview: http://edge.org/conversation/win-at-forecasting. A few of my favorite quotes:
“I naively thought that pundits were in the business of accurately making forecasts” but really they are “flattering the prejudices of their base audience” and routinely “insulate themselves on vague verbiage…cushion themselves with rhetoric”.