A financial modeler's manifesto - hard to model human behavior

Finally, someone says it correctly.

Our experience in the financial arena has taught us to be very humble in applying mathematics to markets, and to be extremely wary of ambitious theories, which are in the end trying to model human behavior. We like simplicity, but we like to remember that it is our models that are simple, not the world.

Bingo!  Unfortunately, this is one of those "esoteric topics" that is "hard for the average person to understand" so it probably "won't get widespread attention" although it's one of the fundamental issues that "caused the current financial meltdown".

Ever notice that WSJ Opinion Pieces don't allow comments?

It's probably because they're all pretty lame.  Latest piece which is tops on the most read list on WSJ is one titled:  "'Atlas Shrugged':  From Fiction to Fact in 52 Years".

Really?

I always wonder about the delusional capacity of people who believe that Atlas Shrugged should be used as a template for real-world action.  It's a piece of fiction.  It's like it has become the greedy capitalist's version of The Lord of the Rings.  Stephen Moore, the piece's author, seems to believe that current events are playing out as a direct corollary to the book's themes (Atlas Shrugged, not LOTR.  Although analogies with that book might be pretty entertaining).

His main thesis is thus:

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

Government programs create havoc and poverty?  Really?  I love this sweeping assumption which has no basis in fact at all.  It's just a prejudice that Republicans love to hide behind, kind of like a religion.  Is there any support for this?  Not really, there have been many, many government programs that have been extremely helpful to our society.  Highways are pretty helpful.  They help companies transport supplies and goods and stuff.  Guess what?  Government built that.  Shocking, I know.  Weights and Measures departments are pretty useful as well.  I like knowing that someone out there is checking each gas station to ensure that when I pay for a gallon of gas, I'm getting a gallon of gas.  Revolutionary stuff that a private company without oversight would eventually screw up.

The idea that private corporations are the answer to all of society's problems is so wrong, it's farcical.  I honestly don't know how all of these Randian/Objectivist wingnuts actually function in society with these beliefs.  Clearly a lot of people believe this crap and in fact there are a lot of successful people who are fervent believers.  Many of our top executives are big-time Randian/Objectivist followers.

But they're also wrong.

Exhibit #1:  Alan Greenspan -- thought that rational self-motivation would cause banks to properly assess and manage risk.  Completely wrong.  So wrong, it f'd up our economy.  And this guy did it by the book.

The fact that they don't understand that there are some things in society that need to be a public good and the best way to fund and provide for them is in the form of a government program confounds me.  Can you imagine if our highway system was built by private corporations?  The amount of toll friction to get anywhere would completely overwhelm the freedom from geography we currently enjoy.  Additionally, I can easily see a scenario prices would skyrocket if there was a natural disaster and people needed to flee a certain area.  Look what happens after natural disasters, prices of replacement goods go through the roof.  Yes, it reflects market mechanisms.  No, it's not good for society and generates results that suck for everybody.

Exhibit #2:  Enron -- these guys were the ultimate free-marketeers.  They were also the guys who took joy in "ripping off Grandma's face" in terms of higher electricity prices created through false scarcities.  They fraudulently gamed a system for pure profit motives to the detriment of our largest tax-generating state.

What frustrates me most is that I haven't seen a good, fundamental refutation of Objectivisism being publicly discussed.  Objectivism (plus Religion) has been the core philosophy of the Republican government that has destroyed the functioning of our markets.  The removal of governmental oversight from our largest financial markets is largely responsible for much of the mess we're in.

Exhibit #3:  Fannie Mae/Freddie Mac -- now this isn't quite as clear cut because they are hybrid governmental/capitalistic vehicles.  And frankly as much blame can be put on the Clinton adminstration for encouraging these guys to pursue subprime markets.  But if you read Bill Burnham's great post on this, you'll see that this can be traced back to a very sophisticated lobbying effort started by the officers of the companies who were, get this, just trying to put into place a strategy that maximized their compensation.  A very Randian thing to do.

The opinion piece is here.  Read it if you want to witness a delusion in action.  It would be pretty funny if most of our current Republican apparatachick didn't fervently believe it.

So let's hope the WSJ turns on comments for their opinion pieces.  It's time someone ripped these guys apart.

Can we put a bullet in Economists yet?

Heard on Bloomberg radio this morning as stated by Chris Whalen of Institutional Risk Analytics:  "The Fed is full of economists.  They know nothing.  They need our help.  Let's help them understand that putting more money into the banks will not do anything to help our economy."  (Or words to that effect.)

Yes, brother, yes!

If this gets ugly...

It could get...er...real ugly.

Check this out.

Surprise! Hedge Funds trade with inside information. Whocoudanowd?!

Arthur Samberg, the CEO and Chairman of Pequot, a giant hedge fund is coming close to being the guy who rips the band-aid off the fact that hedge funds use inside information to generate their returns.  A complex Portfolio.com article outlines how he uses inside information gained from a contractor to trade Microsoft's earnings to great success (+$12MM).  This could be the match that lights the tinder of the fact that a lot more of the hedge industry uses inside information than you would believe.  Gerson Lehrman, a firm that sets up conference calls between "industry consultants" and hedge fund investors, has built a multi-hundred million dollar business based on this model.  They have been finding people within companies for years and brokering calls with hedge funds.  Hedge funds pay big money for these calls because they can usually pump the industry consultants -- people who work in big companies but are moonlighting on the side who may or may not know they're being pumped for information.

It's an offense to all of the other investors who are just trying to play the game fairly.  And at some point, this scheme will be revealed.  Maybe.

Satyam's Fraud Just the Latest Cockroach To Emerge

So, apparently the exportation of America's culture is alive and well.  It just has a bit of a lag.  Satyam's founder disclosed that he had been falsifying accounts in a yarn that starts to smell a lot like Enron.  (Eww, smelly yarn.)  And why not?  So many people got so rich doing it in the U.S., why not try it in countries that have weaker regulatory and legal structures?

We'll be seeing much more of this as time goes on and the repression starts to uncover the warts that a bull market tends to hide.  In investing it's called the cockroach theory.  Financial mistatements and fraud are like cockroaches, once you see one, you can bet there is happy family of a thousand or so living snugly somewhere under your cabinets.  You'll be a stomping, pesticide-spraying fool for months to come!

Michael Hirschorn at the Atlantic Does Not Have A Clue

You know, I just get done praising an excellent article in the New York Times and then something comes along which strengthens my belief that the Mainstream Media is out of their mind.

I just don't get how journalists don't get why they're being disrupted in a wholesale way.  The Atlantic just published an article by Michael Hirschorn that demonstrates he clearly doesn't have a clue.  Not only does not have a clue, the ideas he does have are so totally off-base, it would be amusing if it weren't sad.  Journalists think they are, quite literally, gods gift to the world. Without them, there is no possible way that people can understand what is going on.  The world NEEDS people who don't have any experience in the topics they write about to explaing things to them because clearly only someone without experience will truly understand a complex topic.

Some winner quotes:

The collapse of daily print journalism will mean many things. For those of us old enough to still care about going out on a Sunday morning for our doorstop edition of The Times, it will mean the end of a certain kind of civilized ritual that has defined most of our adult lives. It will also mean the end of a certain kind of quasi-bohemian urban existence for the thousands of smart middle-class writers, journalists, and public intellectuals who have, until now, lived semi-charmed kinds of lives of the mind. And it will seriously damage the press’s ability to serve as a bulwark of democracy.

Uh, did he just say that the loss of newspapers will remove both furious widespread mental masturbation AND the "bulwark of democracy"?!  Seriously, newspapers lack of capability to find and tell the real stories of how things are is one of the reasons why our democracy is in danger.  Newspapers haven't bulwarked much of anything except the P.R. agency which plays them like little bitches.  Bulwarks my ass.

This prompted Henry Blodget, whose Web site, Silicon Alley Insider, has offered the smartest ongoing analysis of the company’s travails, to write: “‘We expect that we will be able to manage’? Translation: There’s a possibility that we won’t be able to manage.”

Really, did the bulwark defender just quote from a blog that has "the smartest ongoing analysis"? Wait until you read the next quote.  This is a classic.

Internet purists may maintain that the Web will throw up a new pro-am class of citizen journalists to fill the void, but for now, at least, there’s no online substitute for institutions that can marshal years of well-developed sourcing and reporting experience—not to mention the resources to, say, send journalists leapfrogging between Mumbai and Islamabad to decode the complexities of the India-Pakistan conflict.

Seriously, I can't write a better hypocritical statement if I tried.  The best part of those two quotes above is that they're actually the first and second half of one paragraph.  If he's not being funny then he's Exhibit A in Why Mainstream Media Sucks Ass.  He doesn't get that the reason why no one values sourcing and reporting is because the sources ARE MAKING THEMSELVES HEARD DIRECTLY ON THE INTERNET THROUGH BLOGGING.  I've been a source for reporters a few times and my experience is that they have no clue, take quotes completely out of context and are filling out predetermined outlines they've already created.  Seriously, they come to interview me because I'm the supposed expert on a certain topic and then they tell me to give them a "killer quote" about the topic that fits their outline.  Wha???  The American readership has picked up on this perversion of information and is now voting with their attention.  They're not voting for professional journalism.

The conundrum, of course, is that those 1 million print readers, who pay actual cash money for the privilege of consuming the paper, and who are worth about five figures a page to advertisers, are far more profitable than the 20 million unique Web users, who don’t and aren’t. Common estimates suggest that a Web-driven product could support only 20 percent of the current staff; such a drop in personnel would (in the short run) devastate The Times’ news-gathering capacity.

Really?  Because I have a friend that used to work for a prestigious newspaper and they would tell me about how they had scads of six-figure reporters who they were lucky to see in the office twice a year to file two stories.  Give me that job!  It's a license to steal and that's what journos have been doing and now that they've been caught with their hands in the cookie jar, they're...well...f'd.

The Internet has done much to encourage lazy news consumption, while virtually eradicating the meaningful distinctions among newspaper brands. The story from Beijing that pops up in my Google alert could have come from anywhere.

Really?  Because I have about 140 feeds into my RSS reader and they all come from sources that have proven to me that they have value in terms of knowing WTF they are talking about and consistently writing about topics that are valuable to me.  I have to spend a lot of time keeping up with this news flow but it's worth it.  I'm consistently in front of critical trends and with critical information, which is...well...critical to my job.  Oh and the thing about the story from Beijing being from anywhere -- WTF?  See, this is the root of what is happening:  Journalism has become so dumbed down and believes that their readers are idiots.  Guess what, it doesn't take much to figure out when you're reading bad info.  Besides, it probably beats the crap that newspapers have been feeding us for years.

The article goes on and on about this crap for a long time, and eventually he starts opining about what strategy the NYT should use.  Listen, show me a journalist that understands strategy and I'll show you someone who left mainstream media awhile ago and started a blog network.  Rafat Ali understands strategy.  Light Reading understands strategy.  Nick Denton understands strategy.  I'll even choke down a shout out to Kevin Rose and Gabe Rivera -- although the jury is out as to whether they understand strategy or if they just lucked out by one of the million monkeys to accidentally type Shakespeare's works.

Here's the article.  Go visit it so that we can help this guy out as he'll clearly be out of a job soon.