At first I thought it was supposed to be a fiction (hey, I was just browsing through the list of books on the Prime library and didn’t do due diligence before checking out the book, free of charge), but, well, I guess it’s non-fiction—which I always interpret as the authors not admitting having made up the story (different and distinct from the story being a true one).

Well. It was an interesting story, written from a clearly anti-Wall Street perspective, which is clear in both the author’s choice of narrators (all of whom are either outside-Wall Street characters or those working against the Machine inside the Machine) and the telling itself—I recommend that you first read the Afterword to set your expectations properly before reading through the narrative; it’s not like there’s a big spoiler; everyone knows largely how the financial crisis of 2008 unfolded.

Some of that choice was inevitable: he was writing a story about short-sellers; because of the structure of the market, short-sellers form a minority, and, well, you know about members of minority and their inevitable persecution complex. But I found interesting how Mr. Lewis chose sore winners for his narrators—the “winners” whose stories he chose to tell were not happy that they won (again, some of that is inevitable part of being short a market; short-sellers may be willing to exploit a weakness but they cannot enjoy the general shared ecstasy of a bull market). Nearly all his “winners” become embittered and defeated in spirit through their experience as narrated in The Big Short, and their bitterness (at least as seen through Mr. Lewis’s eyes) is clear by Chapter 10. Assuming Mr. Lewis told at least their side of the story correctly (again, I’d recommend reading Afterword before other parts of the book), to pick only sore winners as champions of his narrative, it had to be a deliberate choice—part of the narrative Mr. Lewis wanted to tell.

And in fact, it’s that driving purpose that leads to certain … inaccuracies in the book. In particular, one theme Mr. Lewis wanted to drive was how big financial institutions misjudged the risk in the proprietary trades involving the sub-prime mortgage market and selling of CDSs. He drives that point in particular in relating the narrative of Michael Burry, who felt the CDSs he owned were not being priced accurately,

All through 2006, and the first few months of 2007, Burry sent his list of credit default swaps to Goldman and Bank of America and Morgan Stanley with the idea they would show it to possible buyers, so he might get some idea of the market price.
…
The data from the mortgage servicers was worse every month—the loans underlying the bonds were going bad at faster rates—and yet the price of insuring those loans, they said, was falling. “Logic had failed me,” he said.
…
In May [2006] he adopted a new tactic: asking Wall Street traders if they would be willing to sell him even more credit default swaps at the price they claimed they were worth, knowing that they were not.

Critical to this narrative is the idea that price of a security can change dramatically and discontinuously—what Mr. Lewis does not make crystal clear are the conditions necessary for such changes. The conditions which would prevent such change are actually spelled out in a verbatim quote in a teleconference by one of the characters that Mr. Lewis would consider a villain in his narrative,

MACK: Bill, I think VaR is a very good representation of liquid trading risk. But in terms of the (inaudible) of that, I am very happy to get back to you on that when we have been out of this, because I can’t answer that at the moment.

A liquid market would ensure any price change would be nearly continuous (especially in today’s markets, where futures market is closed for no longer than 30 minutes except over weekends). But ignoring that critical element, Mr. Lewis makes the following statement while trying to fit Cornwall Capital’s other investment activities into the overarching theme:

If in the next year, a stock was going to be worth nothing or $100 a share, it was silly for anyone to sell a year-long option to buy the stock at $50 a share for $3. Yet the market often did something just like that. The model used by Wall Street to price trillions of dollars’ worth of derivatives thought of the financial world as an orderly, continuous process. But the world was not continuous; it changed discontinuously, and often by accident.

I imagine Mr. Lewis’s chief mistake is in taking the black swan event and use that experience to draw conclusions about white swans. Stock options generally trade in a liquid market, it means stock prices—and hence option prices—generally change continuously, especially when futures market is included. It is silly for a far out-of-the-money long-term options to be sold at low option premiums, only if you assume that a short position on the option cannot be covered before the expiration date. But all traders know it is silly not to set a stop order on any short position on which loss is theoretically unlimited. Perhaps it’s Mr. Lewis’s experience as bond trader that limits his thinking, but stock options are not bought and sold to be exercised (unlike bonds which are often held ’til maturity)—as Dodd points out in Security Analysis, it is always more sensible to directly trade options and warrants than
to exercise them and then trade the underlying security—your capital outlays will be much less (and returns on equity higher) that way.

And if you take it as given that vast majority of options will not be exercised—that is, many contracts will be closed before the expiration date by the option writers buying back the options to cover their short positions if options somehow remain in-the-money (or near-the-money), there’s nothing silly about far out-of-the-money options being low-priced, regardless of the expiration date—as underlying stock prices move (nearly continuously, changing by less than 10% daily on all but perhaps 5 trading days out of the year) and it becomes more or more likely that out-of-the-money will become in-the-money, the contracts will be bought back.

But this little detail about liquid market fixing many of the problems with the preciseness of pricing model (because, let’s face it; financial markets are not normally distributed; like in many other cases, normal distribution is being used as a convenient approximation) would ruin Mr. Lewis’s narrative about how financial markets do not work, so it has to be ignored—or so I think, anyway.

But anyways. So long as one is not interested in getting a fair hearing of both sides (again, read the Afterword for a hint of that), the book is interesting enough—just remember that there are two sides to every story (like there are two sides to every trade), and you don’t get both sides from the same source (unless you are talking to an economist).

I thought I would just note two rather ironic turns of events:

• Standard & Poors downgrades U.S. credit rating, and the treasury yields plunge, as “flight to safety” causes flow of funds to U.S. treasuries
• ECB refuses to print money by buying up sovereign debt (like the Fed’s QE2 in U.S.), and, in a response, EUR falls like a stone.

In both cases, simplistic analysis of what credit ratings mean (lower credit rating ought to equal higher risk of default, which ought to mean higher borrowing costs, i.e. yield) and supply-and-demand (ECB puts fewer EUR in circulation; EUR should be more expensive not cheap) would indicate the opposite of what actually happened, but, well, that’s the nature of the market. It’s a complex beast, where global forces push things in a way that’s not entirely predictable (as an aside, gold behaved like a safe haven earlier in the year (mostly anti-correlated with stock market indices), until some time in September when it flipped and started behaving like a risk asset (mostly correlated with stock market indices)).

And of course, there are still a couple more weeks left in the year, so who knows what more crazy things will happen …

Date: Thu, 6 Oct 2011 16:08:03 +0000 (UTC)
From: “Amazon.com Associates Program” <no-r...@amazon.com>
To: “xxxx...@bkpark.com” <xxxx...@bkpark.com>
Subject: Important Update for California Associates

Hello,

As you may have heard, California Governor Jerry Brown has signed legislation repealing the law that had forced us to terminate our California Associates. We are pleased to invite all California Associates whose accounts were closed due to the prior legislation to re-enroll in the Associates Program.

If you haven’t already re-enrolled, please click here:

https://affiliate-program.amazon.com/gp/associates/reinstatement/main.html

When asked to sign in, please use the same email address and password that were previously associated with your Associates account. To make your return to the Program as seamless as possible, when you re-enroll, your account settings (login, Associates ID, payment information, etc.) will be the sam=
e as they were previously.

For further information about re-enrollment, please click here:

https://affiliate-program.amazon.com/gp/associates/help/t48

Best Regards,

The Amazon Associates Team

https://affiliate-program.amazon.com/

Well, I guess I’ll enroll today (even though chances are near negligible that I’ll make a buck through the program). I’m hopeful this might be turning tide against tax-hungry states, but this could also be just the eye of the storm: IIRC, Amazon has one year to get Congress to settle Internet sales tax issues (I know, separate from the issue addressed here) before they may have to start collecting tax in CA.

Date: Wed, 29 Jun 2011 19:22:16 +0000 (UTC)
From: “Amazon.com Associates Program” <asso...@amazon.com>
To: “xxxx...@bkpark.com” <xxxx...@bkpark.com>
Subject: Notice of Contract Termination Due to Potential New California Law

Hello,

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com [ http://www.amazon.com/ ], Endless.com [ http://www.endless.com/ ], MYHABIT.COM [ http://www.myhabit.com/ ] or SmallParts.com [ http://www.smallparts.com/ ]. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here [ https://affiliate-program.amazon.com/gp/associates/network/your-account/payee-info.html ]. And if you relocate to another state in the near future please contact us [ https://affiliate-program.amazon.com/gp/associates/contact?subject=&ie=UTF8 ] for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect their ability to purchase from Amazon.com [ http://www.amazon.com/ ], Endless.com [ http://www.endless.com/ ], MYHABIT.COM [ http://www.myhabit.com/ ] or SmallParts.com [ http://www.smallparts.com/ ].

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. We are also working on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

Regards,

The Amazon Associates Team

——————————————————————————

This e-mail was sent to xxxx...@bkpark.com.

Please note that you must use this e-mail address to access your account in Associates Central or when contacting Associates Customer Service.

To manage your e-mail preferences, update your account settings [ http://affiliate-program.amazon.com/gp/associates/network/your-account/main.html ].

Message Category: Notice of Contract Termination Due to Potential New California Law

(c) 2011 Amazon.com. All rights reserved. Amazon.com is a registered trademark of Amazon.com, Inc. Amazon.com, 410 Terry Avenue N., Seattle, WA 98109-5210, USA.

It theoretically affects me, not practically, because, well, I haven’t made any money through the program (I did try placing a few links on this website ). Well, I hope Amazon wins the war, if not these battles.

P.S. The email is technically copyrighted by Amazon.com; given the public nature, hopefully they don’t mind its publication, but if I take it down in the future … that would be because I received a cease-and-desist letter.

P.P.S. BTW, I technically have an address outside California that I can use … but I don’t think it’ll help; it’s in Connecticut.

It is my hope that some of these people consider themselves liberals not willfully and consciously, but because they haven’t given the matter a good deal of thought—and because many people who had access to their malleable minds—i.e. teachers and professors—were liberals and didn’t have the sense not to corrupt the youth.

In this hope, I write here how I became a conservative. Perhaps some will see the validity of my point, and why, for the good of the greater whole, conservatism is a better philosophy than liberalism.

To be completely frank, I have not seriously considered my political identity until, well, until my junior or senior year in college. But I think a couple experiences in my youth laid the foundation for future decisions and thoughts. The first was a conversation with my youth pastor. It happened so long ago that all I remember now are, well, the conversation took place either when I was a sophomore or a junior in high school, and it took place when he was giving me a ride home from some church event. I don’t even remember why the topic came up, but he described the difference between Democrats and Republicans (and incidentally, why he’s a Republican): Democrats want to fix the society’s every problem with more government programs (and more taxes), and Republicans want to leave it to individuals (as well as their money). I don’t know if this made any sense to me back then, but this description—and it is a true description, I doubt even the hardcore liberal would dispute this characterization—was somehow impressed on my mind.

Then the other thing was the high school (well, it was AP) economics courses. I took both the microeconomics and macroeconomics. The one thing that laid the foundation for my conservative leaning was probably the effect of taxes covered in microeconomics course—how the tax, regardless of how it is levied, will be distributed according to elasticity of demand or supply curve, and how it will always result in dead weight, i.e. lost productivity. The macroeconomics course wasn’t so favorable to conservatives: it bashed Reagan’s supply-side economics and tax cuts as “Reaganomics” and offered very little criticism of Keynesians—not that I understand these topics fully now, given that I had no formal economics education since then.

Well, it looks like it will take rather long to finish this story, so I’ll just close for now with this thought: if you want to decide whether you are a conservative or a liberal, focus on this one issue: taxes. Are you willing to pay higher tax to benefit someone else—someone else that you do not know—or would you rather donate that same money to charity (or not at all)? If you choose the former, you may be a liberal. I would like to convince you that taxes are bad, even when the intentions are good, but, well, each to his own. If you choose the latter, you might be a conservative—please keep an open mind. Watch out for media and academic biases (these are fields that tilt heavily to the left, with notable exceptions like talk radio and some economists), trust your own logic above anything else, and verify all supposed facts with multiple sources.

If anything, this is proof that capitalism works, when there are good capitalists (such as executives at Amazon) around, where there is enough competition (Sony’s new, cheaper readers provide real competition with wireless access, unlike iLiad’s readers, which are too expensive and lacks wireless), and where there is not enough regulation to choke the life out of the market.

Competition will drive price down. We don’t need some sort of “consumer protection agency” forcing companies to charge a fair price. Remove the barriers to entry, and the “exorbitant” profits themselves will be the driving force behind the downward pressure in price—increasing supply, attracted to the good profit, ensures that.

Capitalism works not because of virtues of any one man or organization. It works the same way scientific community works: under the usually held assumptions, there is a self-correcting mechanism in place. In science, it’s the principle of peer review—unless the entire community is rotten to the core, bad research will out itself because no one will be able to reproduce it. In capitalism, it’s the price and competition—any misallocation of resources will correct itself because that precise misallocation is an opportunity for profit (see: international trade) and that profit attracts more competitors, which forces everyone to offer lower price or lose business.

On the other hand, socialism works only when there are benevolent, wise government officials. Are you really willing to take that chance?

On second thought, I’m not sure if this is actually a good thing. Divorces are like market corrections. If it needs to happen, then the more quickly it happens (and is over), the better. The Great Depression wasn’t great because of the magnitude of the market correction, but because of its length, and the current recession is bigger for the fact that the necessary market correction, which would’ve burst the housing bubble, was delayed and delayed until the Fed couldn’t hold it back any more.

… Not!

I also bought the newest edition of Graham’s Intelligent Investor. That was 3 days ago. I am now almost halfway through the book, or, at location 4811.

Clearly the problem wasn’t either with the length of the text or how interesting the material is (from purely intellectual level, I think they are of about the same interesting value, as can be attested from the approximately the same number of notes I made reading). So, how was it that I could read through almost twice as much of the latter book in much less than half the time?

I think it comes down to motivation, and more specifically, profit motive. Adam Smith’s book, while it offers a valuable insight into capitalism and market economy (which is why I started reading it in the first place), it is not, in the practical sense, applicable to today’s economy, e.g. the stock market. On the other hand, the information in Graham’s book is the information I need right now in order to make prudent investments in the stock market, as I have been moving my liquid assets into stocks for a week or two and will be buying even more dollar value of stocks in the next few days. I think this profit motive is what made so big a difference in my, ah hem, performance.

I wonder if something similar could be instituted for my, er, day job, if I would be a more productive researcher.

With all the talk of Ally Bank being pressured by the ABA to cut deposit rates, I was hoping that Ally Bank would hold steady on its rates for a while. Unfortunately, that’s not the case. Ally Bank made some sizable rate cuts today. The savings account rate fell from 2.25% to 2.05% APY, the 12-month CD rate fell from 2.80% to 2.49% APY and the 9-month no-penalty CD rate fell from 2.50% to 2.30% APY. The largest rate cut was on the regular 9-month CD. That rate fell from 2.60% to 1.90% APY. Now there’s no reason to choose this classic 9-month CD when the no-penalty version has a higher rate.

And if an anonymous commenter who couldn’t provide specifics is to be believed, the pressure to cut interest rates on savings account and CDs is coming from Mr. Bernanke, the wise regulator who couldn’t see the housing bubble that everyone with half a brain was screaming was coming for years.

Do you need any more evidence that regulations are bad? Some regulations might be necessary, but they are necessary evil—it’s like bandages and scabs on your wound. You need those things at the moment to stop the bleeding, but if you always have bandages on your arm and have scabs here and there, well, something’s wrong with you, buddy. If we actually need regulation anywhere, then regulation is at best a treatment for symptoms and will only get more and more expensive with time. The problem has to be dealt with at the fundamental level.

An example people keep bringing up is the environmental issues. Sure, factories dumping wastes into the local air and water are terrible. Sure, regulation could help with these issues. But it doesn’t fix the underlying problem—that there are people who stand to benefit by being a little less careful with their surroundings and they have no incentive to be careful. But if you look more deeply into the issues, the government created these underlying problems. All that a government is empowered to do and is necessary to do is protect the sanctity of property (and by extension, lawful contracts). When it failed to do that, for whatever reasons, it created the problems that it is now somehow entrusted (by statists and leftists, anyway) to solve it. Talk about leaving the fox with the chicken!

Well. In any case, it looks like if Obama has his way, the middle class families with a little bit of income to save (but not willing to risk it in stock or even bonds) will be left with no option other than to watch their savings diminished by inflation, which is only bound to grow with the reckless spending that Obama administration has shown to be far too willing and able to do. As it is, even at the historical inflation rate of 1%, the current rate of about 2% at Ally Bank is barely enough to keep your money’s value at the exact some worth. If every bank was offering rates like 0.2% (that offered by many banks and even credit unions), you would be better off buying gold and burying it in the ground, rather than keeping the money in a bank and in circulation.

What would regulators do then? Outlaw buying of gold? Punish those trying to sell gold? Apparently your imagination is the limit.